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spk00: Good morning. My name is Megan and I'll be your conference operator today. At this time, I would like to welcome everyone to the MCOR Group second quarter 2023 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 one on your telephone keypad. If you would like to withdraw your question, press star, then two. Mr. Blake Mueller with FTI Consulting, you may begin.
spk06: Thank you, Megan, and good morning, everyone. Welcome to the MCOR 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 Maths, Executive Vice President of Shared Services, who will introduce management.
spk05: Kevin, please go ahead. Thanks, Blake. Good morning, everyone. Thank you for your interest in MCOR as always, and welcome to our earnings conference call for the second quarter of 2023. For those of you who are accessing the call via the Internet 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 2 describes in detail the forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both the disclosures in conjunction with our discussion and accompanying slides. Slide 3 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 mcordgroup.com. With that said, please let me turn the call over to Tony. Tony?
spk04: Hey, 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 MCOR. We had revenues of 3.05 billion, which represents 12.5% revenue growth and 11% organic revenue growth. We earned 196.7 million in operating income, and 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 RPOs, sequentially from Q1 by $413 million, or 5.2%, and from the year-ago period by $1.8 billion, or just over 28%. Our business is performing well across nearly all segments and end markets. Our electrical and mechanical construction segments continue to perform well as evidenced by the strong revenue growth of 20.2% and 12.9% respectively. With mechanical construction operating income margin of 10% and electrical construction operating income margin of 7.5%, the conversion to operating income by these segments, especially mechanical, are 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, biotech, life sciences, and pharmaceuticals. The network and communications sector, which encompasses our data center work, and the healthcare sector are also performing well. We have industry-leading capabilities in BIM, or Building Information Modeling, prefabrication, project planning, labor sourcing, management, and training. We offer a breadth of mechanical capabilities from HVAC, process piping, plumbing, and we are also a leading fire protection and life safety contractor, and our customers look to us to perform complex installation in the markets I just referenced. Our segment and subsidiary management teams are leading in an exceptional manner, and allocating 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 its 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 persists 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 healthcare customers who remain focused on energy efficiency and indoor air quality or IAQ upgrades. We expect to have a strong repair service season because of the heat that has blanketed most parts of the country, as well as extended lead times for applied equipment. This segment continues to enter into facility maintenance contracts, and there is strong demand for our site-based and ROP technician services. We're also excited about our pending acquisition of ECM. ECM is a bolt-on acquisition that adds capability. ECM will enhance our energy efficiency see service offerings and will allow us to offer such services in a more programmatic way to owners looking for multi-site and multi-year programs. Welcome to MCOR and 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 when the supply chain issues subside. Our U.K. business performed in a manner consistent with the available market opportunities. While we saw a reduction in quarterly revenues, the team remains focused on profitability as evidenced by the consistent year-over-year second quarter operating income margins. Building on a storable base of facility services contract, MCOR UK continues to perform various project work for its customers, much of which is aimed at helping them develop and implement multi-year energy reduction programs. Overall, MCOR continues to have a strong balance sheet that supports our organic growth and the capital investment needed for 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.
spk03: 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 supplement Tony's opening commentary on MCOR's second quarter performance, as well as provide a brief snapshot of our year-to-date results through June 30th. All financial information referenced this morning is derived from our consolidated financial statements included in both our earnings release announcement and form 10Q filed with the Securities and Exchange Commission earlier this morning. So let's revisit and expand our review of MCOR's second quarter performance. Consolidated revenues of 3.05 billion are up 338.2 million or 12.5% 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 MCOR 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 $3.05 billion of quarterly revenues represents a new all-time quarterly revenue record for the company. The specifics to each of our reportable segments' second quarter revenue performance is as follows. United States electrical construction segment revenues of $678.2 million increased $114 million, or 20.2%, from 2022's comparable quarter. Excluding incremental acquisition revenues, this segment's revenues grew a strong 13% organically, period over period. Increased productivity within the majority of the market sector served by this segment led to the quarterly revenue improvement. Such growth was most prevalent within the network and communications, manufacturing and industrial, healthcare 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 $1.19 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, networking 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 the design and manufacture of semiconductors as well as electric vehicles and or related battery technologies. There additionally continues to be greater demand from our data center customers. With these results, both our electrical and mechanical construction segments established new second quarter revenue records. Additionally, our combined U.S. construction revenues as well as that of our U.S. mechanical construction segment surpassed their 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 and 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 and or indoor air quality of their facilities. MCOR's industrial services segment revenues of $292.3 million increased $7.7 million or 2.7% as we continue to experience a resumption in demand for our field services and are starting to see increased levels of capital spending within this segment's shop services. United Kingdom Building Services segment revenues of $106 million represent a reduction of $8.5 million, or 7.4% 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, the period-over-period revenue decline is a result of the loss of certain facilities maintenance contracts due to non-renewal. Further contributing to this decrease in revenues is a reduction in project activity, as certain of the segments customers are reevaluating their capital spending programs in light of the macroeconomic headwinds within the UK. Please turn to slide eight. Reported operating income for the quarter was $196.7 million, or 6.5% of revenues. It favorably compares to $137.6 million of operating income, or 5.1% of revenues, a year ago. Consistent with my revenue commentary and Tony's opening remarks, the current Quarters consolidated operating income and operating margin each represent new all-time quarterly records for MCOR. 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 7.5% represents an improvement from the 6.2%. At last year's second quarter, Consistent with this segment's first quarter performance, we experienced better 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. An operating margin of 10% represents a substantial improvement from an already strong 7.2% in the second quarter of 2022. Growth in both gross profit and gross profit margin due to a more favorable revenue mix, including a higher percentage of self-performed projects, were the most significant contributors to this improved operating performance. In addition, This segment benefited from a lack of significant project write-downs when compared to last year, as well as the favorable closeout of several projects during the current year quarter. Operating income for U.S. Building Services is 46.1 million or 6% of revenues and compares to 38.5 million or 5.6% of revenues in 2022 second quarter. Improved operating performance within the segment's Mechanical Services Division as a result of both favorable project execution as well as the impact of contract price adjustments in response to inflation for the primary drivers of the period-over-period increases. Our U.S. industrial services segment's operating income of $7.9 million, or 2.7% of revenues, represents a slight increase in terms of both dollars and margin from the comparable prior year period. We are seeing incremental demand across the segment's scope of services, which has led to a better mix of revenues and resulted in higher gross profit and gross profit margins. Resulting from the reduction in revenues previously referenced, UK building services operating income of $5.9 million represents a modest decrease from Q2 of 2022. However, operating margin of 5.6% 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 2 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% is improved 200 basis points quarter over quarter. Selling general and administrative expenses of approximately $293.4 million represent 9.6% of revenues and reflect an increase of $48 million from quarter 2, 2022. 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. MCOR's 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 our existing workforce and has resulted in a 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 our 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 is $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 the quarter commentary complete, I will touch on some highlights with respect to MCOR's 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 5.9% 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 represents an approximate 57% increase over the $3.36 reported in 2022's 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. Despite 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. MCOR's 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 is 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 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 net 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 balance has increased by $143.8 million as our net income for the period exceeded our share repurchases and dividend payments. As a result of our consistent debt balance coupled with the increase in stockholders' equity, MCOR's debt-to-capitalization ratio has reduced to 10.4% from 11.1% at year-end 2022. MCOR 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, Mark.
spk04: 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 is I wanted to take a step back and talk about what's been driving our exceptional organic growth and our RPO growth over the last two years and what's been driving profitable organic growth for us. And if you look at this page, I'm going to take a step back also and say, If you look at these trends we're talking about on page 12, they're front and center in the news every day. They're not only front and center from customers making investments, they're also the focus of government policy in some cases to strengthen those sectors for the long term. Secondarily, 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're aiding in certain cases, want that kind of workforce on those jobs because it's more productive, it's safer, and it's trained. And again, go back to the great supervision point. So let's talk about each of these in turn, and there's 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. In a lot of ways, that's a whole new industry, right, that's being built in 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 there's more to come. I will say that the pace and timing of actual delivery has been a little slower, but we continue to see the work and book the work, and we're very bullish on the sector. And it's across all of our trains. It's electrical work, mechanical work, and fire life safety. And this is an area where our fire life safety products 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're 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 MCOR we're participating in the 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 that electrification also leads to an energy transition, but I think at MCOR 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. And it's going to be a mix of all kinds of energy and all kinds of solutions to make that energy cleaner. And this part of the trends that are driving our growth in RPOs, I think we're in the first couple of innings of. And I think the government incentives that have been put out through the various acts, and 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 it, you know, and we're still on the front end as these new sites get built up. Let me give you an example. Semiconductor manufacturing. What you read in the paper, a lot of the semiconductor build was happening or planned, and it's going to be bolstered by the CHIPS Act. 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, in a form of semi, the dirty side, which is far from dirty, but it's more the HVAC and process cooling. 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, pharma and biotech. That's actually coupled with what I'm going to talk about later on reshoring, nearshoring. So we're seeing reshoring of the pharma industry to bring resilience to the supply chain. We're also seeing as new drugs get built, like Ozempic, right, where people need to build capacity to build it up. And it's in areas where we are well positioned to do the work, and it's across all of our trades. but especially mechanically in fire life safety. The pharma area of RTP, Research Triangle Park, big pharma area, southern New Jersey, northeastern Pennsylvania, Indiana, and southern California are all big pharma areas, and it's areas where we'll have done the work over time. We have the trust of the customers, and we're well positioned to deliver that work for the long term. As you go to the life sciences R&D, that's much more expansive. R&D facilities are happening in commercial conversions. They're happening at just about every major medical center that we work in. And they're happening also as part of more incubator startup-type companies where we're helping build out the facilities. And in life sciences, it's the same thing there. Again, go to the semiconductors part. We believe that the CHIPS Act will continue to cement those sites as long-term builds. And it's a national security issue. So we think that has long-term build. And when you understand the semiconductor market, once you're on a site and if you're doing good work, you get add-on work on that site to build the next fab, expand the fab, do the process cooling work. The next slide, if you go to the right, upper right, is data centers and connectivity. Through various calls, a lot of questions have been asked, do we see the data center build slowing down? We said no. And we said, well, maybe that's because we're a late cycle. The reality is you've got to figure the big data center owners, especially both the REITs and the five big ones that build it, they understood that they were going to need more capacity, and so they secured the land, the 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 MCORP, big companies like us, are doing more every day, but also AI. Okay. AI is accelerating more build-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 is what a big assembly plant actually uses in the automotive, maybe 20. So think about what you see there. Now we moved, then we moved to 40, then we moved to 50 to 75. The data centers hyperscale that we're building now are somewhere between 75 and 125 megawatts of power. put into perspective, right, you need 5,000, you need 1,500 acres and 600,000 panels to generate 200 megawatts. That gives you an idea, or you need an LM8000 from GE, you need half of the production of one of those gas turbines to support one data center. So just 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 to 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. We're contractors, so two to three years is an outlook for us, but we see a strong data center market for the foreseeable future. Going to the bottom left in healthcare, we've always been bullish on healthcare. A healthcare system is as complex as any of the three things above, right? A major hospital. Every system comes to bear in an operating room, a patient room, an ICU bed, or a very sophisticated outpatient clinic. And what the pandemic taught people, we certainly participated in helping people make their hospitals more flexible, is that's got to be permanent. And so you're 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 that's come now, we are. And the outpatient, we've always maintained hospitals, especially the central chiller plans, and they also look for more energy resilience in those places. So you're 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. Reshoring and nearshoring. I'd like to say we were really seeing this trend in the southeast and southwest with all the things we talked about above. But really, we were headed towards building that capability in the southeast because we believed in reshoring and nearshoring for quite some time. And the supply chains, I would say, got scarily consolidated into one facility. For those of us that maybe grew up a little bit in manufacturing, we knew we should always have two sources of supply. at a minimum of two plants. We got into a world where we were bringing all our supply out of one plant, our customers and 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 nearshoring and reshoring were happening before the pandemic. It's 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 expansion, it's a capacity shifting. It's about resilience, and it's about automation. And we're seeing that across just about any industry we work in. And finally, one of my favorite things is energy efficiency and sustainability. I personally have been around that almost going on 30 years now. It's amazing how far we've come in HVAC equipment and controls upgrades, but also our ability to implement those solutions that the manufacturers bring. You know, you think about efficiency is 50% better today than it was a mere 10 to 15 years ago. And we're doing that things with variable speed drives. We're doing that with control systems. We're doing that with sensors. And that's sort of stuff we've been doing for a while. But now customers are also looking for water and waste reduction. Manufacturing plants are more into how they're managing their compressed air system, all their waste gases. And also facilities rationalization and footprint rationalization, that's accelerating as people do this reshoring, nearshoring, and 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 a solar onsite 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, it's had utility incentives through years, it's had state incentives, and now there's gonna 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 RPO growth. And if you look at our RPO growth, I'm going to talk about some high level things. And we can talk about strong demand across all these major themes. Our RPOs 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 2022 second quarter, or 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 we're up $413 million from the end of the first quarter. So I'm going to give you some big trends out of those RPOs. Domestic construction RPOs up 33% versus the year-ago period. Building services RPOs up 14.5% versus the year-ago period. Network and communications, which includes our hyperscale data center work, stands at $1.2 billion, up 52% versus the year-ago period. High-tech manufacturing sector, which includes semiconductors, pharma, biotech, life sciences, R&D, and the electric vehicle value chain are up 160% versus the year-ago period, and they now total $1.2 billion. Healthcare RPOs, I talked about those trends there with the hospitals and outpatient facilities, they're up 50% versus the year-ago period. manufacturing, industrial, which points right toward reshoring, nearshoring, capacity, transition, flexibility, expansion. They're up 35% versus the year-ago period. So you see those trends manifesting themselves into our RPOs. Our bid log continues to remain strong, and we continue to see opportunities across these market sectors and other sectors. Other sector activity includes institutionals up 13%. Short duration projects, which includes a lot of the HVAC retrofit project works up 7%. Reality is that's hitting stasis, right? We're getting used to the lead times. We're 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 booked six to 12 months ago. Partially offsetting that is a decrease in transportation and water and wastewater RPOs. They tend to be more episodic in their award. And we have a very good position in water and wastewater in some of the markets that matter most. And you've seen those big awards come in and out of our RPOs there. We do remain balanced in our market participation. We're winning new work in most active of the non-residential sectors. And why are we doing that? One is the market's 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 have 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 every day. Now I'm 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 $9.25 to $10 to a range of $10.75 to $11.25. Our revenue guidance will remain unchanged at $12 to $12.5 billion. As reflected in our RPOs, we are winning work in important and strategic market sectors. We are 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, prefabrication, labor management, and supply management capabilities with an eye delivering to delivering superior results for our customers and growth and results for our shareholders. The supply chain remains challenging for any engineered or 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 trained frontline leadership is both a challenge and an opportunity, and we've always met it. And we believe that we will continue to be, through our subsidiaries, an employer of choice. We also believe that we are well positioned to navigate these headwinds. And we'll 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 gonna 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 that we announced a few weeks ago. With the uncertainty in the financial markets, we believe our strong balance sheet, we know, we not just believe that, we know that our strong balance sheet help us work on large, sophisticated projects As a customer, see our financial stress as another reason to choose MCOR. I would be remiss if I didn't thank our entire MCOR team for their dedication and hard work and discipline. We all appreciate all you do every day. And with that, I'll take questions. Megan, I'll turn it over to you, our operator.
spk00: 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 your question, please press 2. Please press star, then 2. The first question comes from Adam Valheimer with Thompson Davis. Please go ahead.
spk07: 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 work? wrap up into your thoughts on the prospect for continued sequential backlog growth?
spk04: Yeah, I mean, look, I've said it a thousand times. It's, you know, we're at a very good level of RPOs. We have opportunities in front of us, you know, projects, large awards come in and, you know, because you booked it two weeks after the end of a quarter doesn't mean you've lost momentum in your business. Also, as you're at a 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 you get follow-on work that over a period of 18 months, which is a project less of a lot of these, is every bit as big. But because they 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 to broad themes that are driving our business and driving our sector and the economy. We have something that's very valuable, which is highly skilled technical labor that can execute the most difficult jobs and provide service in the toughest situations. So I guess in the 19 years I've done this, I've never thought about what sequential RPO or backlog growth looks like. I certainly have joined that we've had booked a bill of over one for, I think, eight or ten quarters in a row. I don't see maybe that slowing down, but the flip side is if it was .98, I don't think that means much of anything, to be honest with you.
spk07: 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?
spk04: We have. You know what? This is all project timing related. When a turnaround starts and ends, We've never provided quarterly guidance and I don't think we're going to start now, are we, Mark? No, we're not.
spk07: And then lastly, fire protection. Can you give us a sense for how accretive that is to mechanical margins?
spk04: Well, it operates at better margins than the base business. Some of that has to do with the material component of those jobs. It has a higher labor component. But, you know, it's helping. It's providing, you know, a nice cap on it. But, you know, they're tough jobs and we've got to execute.
spk07: Okay. I'll turn it over.
spk08: I might hop back in. Thanks so much.
spk01: Again, if you have a question, please press star then 1.
spk08: Okay, Adam, hop back in if you want. Sure, go ahead. All right. Oh, okay, sorry. Okay, go ahead, Adam.
spk07: Sorry, I did want to ask about the shop business. When was the last time the shop business was strong? I can't even remember. 2018. 17, 18. And how meaningful could that be to that segment?
spk04: It's not non-meaningful.
spk07: Also, my list, I had solar. When you thought that might gain traction?
spk04: You know, 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. There's a lot of land bought. There's a lot of contracts, you know, purchase prior agreements out there. We had a full book of business. I expected to do, you know, 10%, 12% revenue of that segment. But the reality is there's not a lot happening there right now. Now the smaller ones are happening. So when we're on a hospital site or a campus site where we're doing the carports, actually 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 you're talking utility-scale solar, and again, I think there's probably people that are better qualified than me to talk about that. We're just not seeing the activity we expected to see this year. Okay.
spk01: All right. Thanks, guys.
spk00: The next question comes from Sean Eastman with KeyBank Capital Markets. Please go ahead.
spk02: Hi, team. 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 and the outlook for the year. Obviously, we had a really strong start on 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 2Q, kind of blowing out the margin expectation, and you guys are releasing more. of that kind of elevated margin and a juicier guidance update. So I just wanted to get a sense for what changed in your view and what's kind of come through stronger to give you more confidence to just guide margins up from here versus last quarter.
spk04: Yeah, so I'll take a high-level view and then turn it over to Mark. I think there's three things we have more confidence in. One is a mix of our work going forward, and we have pretty good visibility on what we're nearing completion in 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 business is back on track with a great mix of work. and 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 is, at a high level, that mix of things, and I'll let Mark get into more of the specifics.
spk03: Yeah, Sean, I think, you know, clearly, you know, and not to rehash history, but, you know, quarter one from a seasonality perspective, you know, tends to be one of our weakest quarters in the year, despite the fact that our industrial services segment is executing, you in the earlier periods of their spring turnaround season. You know, I think when you look back to where we were exiting last year and certainly where we were a year ago at this time, you know, and Tony and I both have commented on this multiple times during this morning's call, you know, the revenue mix was good. It certainly wasn't bad, but we certainly had some projects in the mix that were, you know, marginal contributors or they were in lost positions. You know, so I think The term of absence of badness that 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 an activity perspective. The other thing, and we 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 than it certainly was at the midpoint of last year. So we're seeing 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 mentioned this in my prepared commentary, in the U.S. mechanical construction segment, we did have some favorable project closeouts. So back to the earlier caller's point, You know, we only control the start and stops of projects based on our customers' project timeline. To the extent that we execute in the fixed price environment or arena on a better basis, then we obviously capture that improvement, and ultimately we recognize it where it's appropriate. We certainly had that phenomenon in the second quarter, and as we look at the book of business as we progress through the rest of 2023, You know, we don't see any particular problematic areas, you know, other than the fact that, you know, we have thousands of active projects out there with, you know, 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, but, you know, ultimately, you know, the book of business is very, very strong. We're happy with the labor complement we have on the jobs. and the operating environment is still not optimal with regards to things that are outside of our control, but we've certainly seen some stabilization, which is giving us a little bit more positive momentum as we look at the outlook for the business.
spk04: Bottom line is we called revenue about right at the beginning of the year, but our margins are 100 basis points higher than the 120 basis points higher than we thought they were going to be.
spk02: Okay, got it. That's helpful. And do you think that we're setting tough margin comps here in 2023? Or do you feel like in light of the mix of work in the pipeline, the complexity of projects driving RPOs and the bid pipeline, that there's some differentiation in the marketplace that perhaps we haven't seen before? And you know, we can view this performance we're seeing here as sustainable.
spk04: Yeah, you know, Sean, I've said a lot of times, I go back to the way Adam asked about backlog or RPOs. I think about margins the same way. One quarter doesn't make a trend. We look over, you know, four or five quarters to see a trend. 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 especially the data center work we expected to in the electrical segment. And I said last year, we look at underlying productivity. We look at the things we're doing to drive productivity. You've 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 is the ideas. And the idea is that we're driving that productivity. So, you know, quarter to quarter, they could fluctuate some. We definitely think, you know, as we're 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 in RPOs. We like the mix of working at RPOs. But, hey, we've got to go out and execute. We've got to have customers that hang in there with us, and we will.
spk02: Okay, got it. And then just kind of going back to your end market driver's commentary, Tony, I mean, we look at the RPO disclosure as kind of a leading indicator of demand. And I wondered if you would say that perhaps there's greater visibility in the model than we can even really observe in the RPO disclosure, just in light of you know, they're being more programmatic and, you know, larger multi-year programs, you know, just kind of more complex infrastructure challenges driving the business that would suggest, you know, perhaps you have more of a multi-year type of visibility that, you know, isn't fully captured in what we see in RPOs. What would you say there?
spk04: Yeah, what I think I said while I was going through that page, page 12, I said, You know, as a contractor, we don't try to 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 that these six things that we were driving our RPOs 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 manifests itself is I think exact words I use, something like that. How it manifests itself quarter to quarter, I don't know, but I do know that we're well-positioned in some really critical, as you would say, infrastructure-type, not the big I infrastructure, but the small I infrastructure-type sectors that we feel really good about. But guess what, Sean? We've got to go out and execute every day. And we get graded every day by our customers. We get graded every day. And look, the site might be great for five years, But any one of these sites, they could take a six-month pause, and there's nothing we could do about that. And you saw that last year in the data center business, right? Our electrical business has a wonderful position in the data center 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 gonna start. So last year we thought we were gonna start a bunch of work in the first quarter. And when 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 it start? Well, it mainly didn't start because the switchgear was eight weeks late. The smart panels were six weeks late. The generators were five weeks late. So they are our owner-procured materials. So instead of starting those jobs, February 1st, 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, you know, the trend's great, right? And so I was getting questions the last first quarter, is this the end of the data center build? And we said, no. And here we are with $1.2 billion in network and communications RPOs. So the RPOs do tell a story, but in a lot of ways it's not a quarter-to-quarter story
spk02: Yep, and I think it's notable for you to be talking two to three years. You know, if you just look at the long-term history of the business, for you to be out, you know, kind of seeing robust trends out over multiple years, I think in itself is notable.
spk04: Yeah, well, I think you can't run from success that you've had where you've entrenched yourself into really good positions. But again, our customers can make a decision not to build in a certain way. I think we'll perform. I don't think that's going to be an issue. But they can delay things by a 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 long, good-turn trend. It just means, hey, they took a pause.
spk02: Got it. I really appreciate all the insights. I'm going to go see what Brian Lane has to say now.
spk03: All right. All right. Thank you. Tell them hi.
spk02: Bye, guys. Bye-bye.
spk03: Okay. I think that's it.
spk04: Thank you all, and have a safe rest of summer. Pay attention to the heat. Drink a lot of water. Be well. Bye.
spk00: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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