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spk09: Good morning. My name is Alan, and I will be your conference operator today. At this time, I would like to welcome everyone to the MCOR Group fourth quarter and year end 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 the number one on your telephone keypad. If you would like to withdraw your question, please press star, then two. Please note, this event is being recorded. I'd like to hand things over to Mr. Blake Mueller with FDI Consulting. You may begin.
spk05: Thank you, Alan, and good morning, everyone. Welcome to the MCOR Group Conference Call. We are here today to discuss the company's 2023 fourth quarter and full year 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.
spk04: Kevin, please go ahead.
spk18: Thanks, Blake. 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 full year 2023. For those of you who are accessing the call via the Internet and our website, welcome to you as well. And you've arrived at the beginning of our slide presentation that will accompany our remarks today. We are on slide two. This presentation is certain forward-looking statements and may also contain certain non-GAAP financial information. Page two describes in detail the forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides. Slide three depicts the executives who are with me to discuss the quarter and full year 2023 results. They are Tony Guzzi, our Chairman, President, Chief Executive Officer, Mark Pompa, Executive Vice President, Chief Financial Officer, Jason Nabandian, our Senior Vice President and Chief Accounting Officer, Maxine Mauricio, Chief Administrative Officer, Executive Vice President and General Counsel, and Andy Backman, Vice President, Investor Relations. 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 always find us at mcoregroup.com. And with that said, please let me turn to call over to Tony. Tony? Thanks, Kevin.
spk14: Good morning, and thank you for joining us for our 2023 full year and fourth quarter earnings call. Before we begin, though, I would like to recognize two of our executives, Mark Pompa and Kevin Matz. As we have previously announced, Mark and Kevin will close out two remarkable MCOR careers on April 1st. I want to thank them for their hard dedication hard work, dedication to MCOR, and you've been great teammates. I know they both share our excitement about the future at MCOR, as Jason will take the helm as our CFO. Andy will take over Kevin's investor relations responsibilities. I also want to recognize the promotion of Maxine Mauricio to Chief Administrative Officer, as she assumes some of the oversight duties previously held by Kevin. Thank you again to Kevin and Mark Congratulations to Jason and Maxine. And a continued warm welcome to Andy, who joined us this last fall. Now I'd like to turn you to page four to six, and that's where I'm going to start my comments. I'm going to focus most of my comments on our full year 2023 results. And Mark will go into more detail about our fourth quarter. We had a great fourth quarter at MCOR. We outperformed our expectations. earning $4.47 per share on $3.44 billion in revenue, which represented 16.2% organic revenue growth. Our fourth quarter operating margin was exceptional at 8.4%. Fourth quarter rounded out an excellent 2023 by any measure. We did have an incredible 2023 with revenue of $12.6 billion, representing growth of 13.6%, and organic revenue growth of 12.6%. Our earnings per share increased by approximately 65%, and our operating income of $875.8 million grew 55% over that of 2022. with record annual operating margin of 7.0%. Operating cash flow of $900 million, represented a conversion in excess of 100% of operating income. You know, we had a lot go right for us in mCORN 2023, and this incredible performance is a testament to our leadership at all levels of our company, including our segment and subsidiary leaders, who have delivered exceptional results for our customers, shareholders, and teammates over an extended period of time. Over the last three years, we have more than doubled our earnings per share with a compound annual growth rate of 28% in a difficult and uncertain business environment. Our teams drive our results by relentless focus on long-term growth, productivity and innovation, balanced capital allocation, and we live our MCOR values of mission first, people always, and they've been embraced throughout our company. We also have strong workforce training and development programs. We're fortunate to operate in large, growing market sectors like high-tech manufacturing, networking communications, manufacturing, and industrial. These sectors, as well as our energy retrofit projects, are benefiting from long-term secular trends that require excellence in specialty trade contracting. We have challenges, but we have met them and will continue to meet those challenges with resolve and with a strong, focused execution at every turn. We finished the year with our RPOs at an all-time high of $8.85 billion, which represents 2.5 percent sequential growth from September 30, 2023, and 18.6 percent growth over the year-ago period. Now I'm going to proudly share some highlights from our segments. We had excellent performance in each of our mechanical and electrical construction and U.S. building services segment. Mechanical construction had an especially stellar 2023. The operating results of our industrial service segment continue to improve at a measured pace, and despite unfavorable economic conditions, our U.K. building services segment is reporting solid operating income and operating margins. The continued strength of our electrical mechanical construction segment is evidenced by 2023 revenue growth of 14.4 percent and 18.2 percent, respectively. With 2023 electrical construction operating margin of 8.3 percent and mechanical construction operating margin of 10.5 percent, the conversion from revenue to operating income by these segments has exceeded our expectations and really is a result of excellent execution, adaptability, smart project selection, and favorable contract terms. In the construction segments, we selected key market sectors, estimated, negotiated, and won meaningful projects, planned and executed such projects well, and safely deployed our highly skilled labor with strong productivity. Our teams have increased productivity by employing BIM, or Building Information Modeling, and prefabrication at scale while sharing best practices on construction means and methods across our company. Said simply, we have learned from both our successes and failures, then deploy those learnings across our company to drive excellent results for our customers and superior financial returns for our shareholders. In our construction segments, we continue to win and complete some of the most sophisticated projects in markets such as high-tech manufacturing, which includes semiconductors, the EV value chain, biotech, life sciences, and pharmaceuticals. The network and communication sector, which encompasses our data center work, and the manufacturing sector, which is being driven by reshoring, domestic capacity expansion, and also includes the renewable energy projects we're working on, and we have continued to see growth in our healthcare sector. As a reminder, our mechanical product offering is brought across applications such as HVAC, process piping, plumbing, fire protection, and life safety. We are operating in key geographies where such projects are in process, and our life safety group has the capability to move across the country. We are positioned well with the right resources in the right market sectors and geographies to continue to win complex projects that allow us to perform well for our customers. Our electrical and mechanical construction teams have deep expertise in data center market which allows us to serve our customers with the right solution delivered under the most demanding schedules with excellent outcome for our customers. As I have mentioned on earlier calls, our segment and subsidiary management teams are leading in an exceptional way and allocating resources in a thoughtful and pragmatic way. We continue to strive to optimize our project mix to produce great financial results. Our U.S. building services segment continues its record of steady and impressive performance, and it has a strong mix of work across its service lines. This segment's revenues grew 13.3% in 2023 with an operating margin of 5.9%. Demand persists in our mechanical services division with excellent execution across retrofit projects, building controls, and maintenance and repairs. We are working across a variety of end markets, and our customers remain focused on energy efficiency, and indoor air quality upgrades. The mechanical services business drove the robust performance of this segment in 2023, due in large part, not due in large part, just due in part, to a strong repair service season this past summer as heat and humidity blanketed most parts of the country. The Site First Services Division continues to deliver, entering into multi-year facility maintenance contracts to leverage our self-performed operating model for skilled tradespeople and operating engineers. While opportunities for growth remain in this area, these facility services contracts take some time to ramp up, and the scope for these contracts can reduce, expand, or be terminated over time and upon rebid. We have seen some contract degradation as the real estate facility providers are especially aggressive on price and scope on some of these contracts as they are struggling in their commercial real estate businesses. However, we will remain disciplined and not take any low price, low opportunity contracts. Our industrial services segment improved in 2023 and had sustained performance improvement over the last two years. Operating income improved by nearly 80% in the year, albeit from a low base. We had more turnaround seasons in 2023, and we had strong results from our dish services like heater repair. We are experiencing greater levels of capital spending within our shop services division in the form of increased new-built heat exchanger orders and have benefited during the year from certain renewable fuel projects. We are just starting to see the resumption of demand for utility-scale solar projects currently impacted by supply chain and permitting issues. Our industrial service and electrical team has positioned well in the solar market, and that position should continue to improve. Our UK segment performed in a manner consistent with the available market opportunities in The competition on some contracts is fierce, as the UK economy is not strong. And similar to the US facility services market, we see the real estate companies bidding on contracts aggressively due to weakness in the UK commercial real estate market. However, we have a durable base of facility services contracts. We'll build on that base and serve our customers well. And though we experience a reduction in annual revenues in this segment, we are executing well as shown by the 5.9% operating margin for the year. Our balance sheet remains strong. It supports our organic growth, and it provides us with the capital needed to expand our prefabrication capabilities and investment in BIM, automation, and robotics. We also have the firepower to continue to make strategic acquisitions, and I'm going to discuss that in more detail later. With that, Mark, I'm going to turn it over to you. Great.
spk17: Tony, thank you for those kind words you said earlier, and good morning to everyone participating on our 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 2023 results, as well as a summary of our full-year performance, some of which Tony just 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. With that, let's begin our review of MCOR's fourth quarter. Consolidated revenues of $3.44 billion increased $489.4 million, or 16.6% from the fourth quarter of 2022. Each of our domestic reportable segments experienced revenue growth during the fourth quarter, which was the case for all four quarters of 2023. Revenues attributable to businesses acquired during the quarter were just under $11 million, so substantially all of our quarter-over-quarter revenue growth was due to organic activities. Our fourth quarter's consolidated revenues established a new all-time quarterly revenue record for the company and eclipses our previous record set during the third quarter of 2023. The specifics to each of our reportable segments' fourth quarter revenue performance is as follows. United States electrical construction segment revenues of 763.4 million increased 49.8 million, or 7%, from quarter four of 2022. This segment continues to experience revenue growth across the majority of the market sectors that we serve, with the most significant fourth quarter revenue increases being generated within the manufacturing and industrial and high-tech manufacturing market sectors. Revenues of our United States mechanical construction segment of 1.47 billion, increased 339.3 million or approximately 30% from the year-ago period. This segment experienced revenue growth across all market sectors in which we operate, with the most significant growth occurring within the high-tech manufacturing market sector. In addition, notable increases were seen within the manufacturing and industrial, network and communications, healthcare, and water and wastewater market sectors. As communicated throughout the year, Driven by customer projects supporting the design and manufacturing of semiconductors, as well as production and development of electric vehicles and or related battery technologies, this segment is experiencing strong demand for both fire and life safety, as well as traditional mechanical services. This is in conjunction with continued data center development, as well as the domestic reshoring of critical supply chain by certain of our customers, are the contributing factors to this segment's significant organic growth. Both our electrical and mechanical construction segments established new all-time quarterly revenue records with their fourth quarter performance. Revenues of MCOR's combined domestic construction segments totaled $2.24 billion for the fourth quarter of 2023, an increase of $389.1 million, or just over 21%. United States Building Services quarterly revenues of $802 million increased to $88.6 million, or 12.4%. Excluding incremental acquisition contribution, this segment's revenues grew 10.9% organically, given increases across each of its operating divisions with the most significant growth being generated by mechanical services. Within mechanical services, we are benefiting from strong demand for HVAC projects and retrofits, as well as building automation and control services. While customer initiatives to improve energy efficiency and our indoor air quality are certainly contributing to this demand, our opportunities remain broad-based and are further enhanced by mandated refrigerant phase-outs. In addition, our service volume continues to grow given an increase in our customer base as well as our geographic footprint. MCOR's industrial services segment revenues of $292.5 million increased $16.2 million, or 5.9%, quarter over quarter. This marks this segment's fourth consecutive quarter of top-line growth. In addition to more normal maintenance demand, we experienced the resumption in capital spending by our customers in the form of new-built heat exchanger orders and participation in several renewable fuel projects. United Kingdom Building Services segment revenues of $108.8 million represents a reduction of $4.5 million, or 4%, from last year's fourth quarter. As referenced throughout 2023, this segment's revenues have declined due to the non-renewal of certain facilities maintenance contracts, which were still active in 2022, as well as a reduction in project work from certain of this segment's customers who slowed their capital spending programs in response to macroeconomic headwinds within the United Kingdom. Please turn to slide eight. Reported operating income for the quarter was $289.2 million, or 8.4% of revenues, and favorably compares to $177.2 million of operating income, or 6% of revenues, a year ago. Consistent with my revenue commentary, Our fourth quarter operating income and operating margin both established new all-time quarterly records for MCOR. This was achieved through increased operating income in each of our reportable segments, as well as expansion in operating margin in all but one of our segments. Specific fourth quarter operating performance by segment is as follows. Our U.S. electrical construction segment earned operating income of $76.3 million, an increase of $18.2 million, or 31.3% from the comparable 2022 period. The reported operating margin of 10% represents an improvement from 8.1% in last year's quarter. Increased gross profit and gross profit margin within the institutional, commercial, and high-tech manufacturing market sectors were the primary drivers of this improved performance. As a reminder, the results of this segment during the fourth quarter of 2022 were negatively impacted by certain discrete project lockdowns, which totaled $10 million and reduced this segment's operating margin by 140 basis points. in the 2022 fourth quarter. Operating income of our United States Mechanical Construction Services segment of $186.1 million represents a substantial increase of $81.3 million from last year's quarter. An operating margin of 12.6% represents an all-time high for this segment. Greater gross profit dollars and gross profit margin in the majority of market sectors in which we operate, driven by a favorable revenue mix, successful project closeouts, and better execution were the factors behind this segment's improved performance. Operating income for U.S. building services was 42.1 million or 5.2% of revenues, which represents a 10.8% increase. The improved year-over-year performance was primarily due to the segment's mechanical services division, given the volume growth referenced during my revenue commentary, coupled with favorable execution on both their HVAC project and repair service activities. Our U.S. industrial services segment operating income of 12.6 million or 4.3% of revenues represents an increase of just over $11 million from the corresponding 2022 period. Led in the quarter by improved pricing within a shop services division, we are continuing to see operating margins of this segment move in an upward direction. UK Building Services is reporting operating income of $5.5 million, or 5% of revenues, which compares favorably to that of the prior year period. The decrease in the segment's revenues was more than offset by increased operating margin as the segment continues to execute well across its portfolio of facilities maintenance contracts and add-on project work. We are now on slide nine. Additional financial items of significance for the quarter not addressed on the previous slides are as follows. Quarter four gross profit of $617.7 million represents an all-time quarterly record for the company, and it is higher than the comparable 2022 period by approximately $163 million, or nearly 36%. Gross margin of 18% is improved to 260 basis points, period over period. Selling general and administrative expenses of $328.5 million represent 9.6% of revenues and reflect an increase of approximately $51 million from quarter four, 2022. SG&A for the current year's quarter includes $2.7 million of incremental expenses from businesses acquired, inclusive and intangible asset amortization, resulting in an organic increase of just over $48 million, which was largely driven by personnel costs. In addition to annual cost of living adjustments and greater employee benefit costs, our strong organic revenue growth has necessitated increased headcount across many of our businesses. Further, the operating income outperformance across the majority of our reportable segments during the fourth quarter and full year 2023 periods resulted in incremental incentive compensation expense. Diluted earnings per common share in the fourth quarter of 2023 is $4.47 compared to $2.63 per diluted share in the prior year. This fourth quarter EPS performance, like many of our financial metrics this quarter, eclipses MCOR's prior all-time quarterly diluted earnings per share record, which was previously established during the third quarter of 2023. Please turn to slide 10. With the quarterly commentary complete, I will now supplement Tony's comprehensive introductory remarks on MCOR's annual performance. Consolidated revenues of $12.6 billion represent an increase of $1.5 billion or 13.6% when compared to 2022. Our full year results include $107.1 million of incremental revenues attributable to businesses acquired pertaining to the time that such businesses were not owned by MCOR in 2022. Excluding the impact of acquisitions, annual revenues increased a strong 12.6% with all of our reportable segments, other than our United Kingdom Building Services segment, generating strong revenue growth during the full-year period. Operating income of $875.8 million, or 7% of revenues, represents a 55% increase from calendar year 2022, along with 190 basis point improvement in operating margin. Each of our domestic reportable segments, as Tony commented, achieved double-digit increases in full-year operating income, along with meaningful improvements in operating margins. Full year diluted earnings per share is $13.31 and compares to $8.10 in the corresponding 2022 period. Adjusting 2023 to exclude the third quarter impairment charge related to certain long-lived assets within our United States mechanical construction segment results in an adjusted non-GAAP diluted earnings per share of $13.34 for the year. This represents a 65% improvement over 2022's reported diluted EPS. Not surprising, with our strong performance throughout the last 12 months, full year 2023 represents a record year for MCOR, surpassing the company's previous all-time performance achieved in 2022. We are now in slide 11. The strength of MCOR's balance sheet continues to differentiate us from our competition and provides our customers with confidence as we bid on large-scale and demanding projects. Given our balance sheet, coupled with the borrowing capacity available to us under our recently amended and extended revolving credit facility, we remain well positioned to fund organic growth, pursue strategic M&A opportunities, and return capital to shareholders. Our commitment to shareholder return is evidenced in part by today's announcement that our Board of Directors has approved an increase in our quarterly dividend of almost 40%. Notable fluctuations in our balance sheet when compared to December of 2022 are as follows. Cash on hand is $790 million and represents an increase of just over $333 million. Our exceptional operating cash flow performance of $900 million, which Tony commented on earlier, was partially offset by cash used for financing activities of just over $412 million, given the repayment of all amounts previously outstanding under our term loan and the return of $160 million to stockholders through share repurchases and dividends. as well as cash use and investing activities of $161 million for acquisitions and capital expenditures. Resulting primarily from the increase in cash just referenced, our working capital balance has increased by just over $220 million from December of last year. Goodwill has increased by $37.4 million as a result of the eight acquisitions completed by us in calendar 2023, while net identifiable and tangible assets have decreased by $7.9 million as the additional intangible assets recognized in connection with these acquisitions was more than offset by $67.1 million of amortization expense in 2023. The total debt exclusive of operating lease liabilities has decreased by $241.9 million, almost entirely as a result of the aforementioned repayments made on our previously outstanding term loan. After considering outstanding letters of credit, there remains $1.2 billion of capacity available to us under our renewed $1.3 billion revolving credit facility, the maturity of which now has been extended to December of 2028. Our stockholders' equity balance has increased by almost $500 million as our net income for the year exceeded our share repurchases and dividend payments made throughout 2023. MCOR's debt-to-capitalization ratio has reduced to 0.2% from 11.1% at year end to 2022, given the full repayment of our term loan as well as the increase in stockholders' equity, both of which I just referenced. With my portion of this morning's prepared comments complete, I will now give the call, thankfully, back to Tony. Thanks, Mark.
spk14: And I'm going to start on page 12. And what you really can think of this, the way we talk about earnings, is we just talked about everything that happened in the past, and this next section is all about the future. And if you go to page 12, we've talked about this chart probably about three quarters ago we started talking about it. And I look at this as a resource allocation chart. It not only informs how we allocate resources to drive organic growth, but this chart also informs our capital allocation decisions, which we'll talk about later. So you think about this chart and moving left to right, and it'll be some intermixing. The first part is the electrification EV value chain. It's a trend, and there's been a lot in the news lately about what's happening, is it stalling and all that. In our world, it's not right now because of where we played. For us, it's mainly been about fire life safety and utility scale charging stations, and now solar is starting to come back up on the radar. But the way I think about this, this is a major transformation, whether EVs and the electrification hits 10% of vehicles, whether it hits 15% of vehicles, whether it hits 30%. And clearly, the policy got a little ahead of the technology here, but that's okay. At the end of the day, all these facilities will be built. Some of them, the battery infrastructure is going to have to be built. Again, no matter what penetration it has, it's a lot more than it is today. And the utility scale charging stations that we participated in, these are at major hubs of transportation. And some of this is well underway because it makes sense, especially for delivery vehicles and other things that have lighter weights. The solar is just starting to reengage in our part of the world. And we do that mainly in electrical. We do that some in the electrical segment, some in the sub-utility scale in building services, and we'll talk about that later. But then at scale, we do it in industrial services through our electrical business there. We have great capability there. And it's also supported by the IRA and government incentives. And we are privileged to be able to either do that with union labor where applicable, or we have the necessary prevailing wage experience, and apprenticeship programs in the non-union world to be able to do that. And you'll hear that theme across some of these trends. Then you get to the high-tech manufacturing. So look, me on electrification EV value chain, pretty good market. What we're building, we're going to continue to build. All big markets go through periods of up and down, but the long-term trend, I think, is intact. And again, whether it's 7%, 15%, or 30%, there's a lot of facilities, a lot of utility-scale charging that needs to happen. And if we just get a share of the solar market going forward, we'll see that in our industrial services segment. You go to high-tech manufacturing life sciences, and you really got to look at this box and draw a little loop down to reshoring and nearshoring. We learned in COVID that supply chains weren't as resilient as they should be. I don't think we learned that. We probably knew that, but we needed to have a lesson like that. So we're seeing our customers move their supply chains back onshore. This was happening even before COVID because the wage differential versus the transportation and the uncertainty of transportation was not what it was. And automation allows you to make up for a lot of that wage differential. But you're really seeing it. The semiconductor manufacturing, which we're such a big part of, and we've expanded where we can do that. We only could do that in a couple markets before. Now we can do that and double that number. So maybe we were two before. Now we're four to six. And that is, for us, weighted towards mechanical. But electrical, we still do that work there. And fire life safety. So we represented all trades, but weighted more towards mechanical. And you see that in our RPOs. And you've got the pharma, biotech, life sciences. Again, there's two things happening there. There's reshoring. And we're in a lot of the right markets to make that happen, whether it's the Carolinas, parts of California, Indiana, or New Jersey. But there's also an explosion of new drugs, specifically around weight loss. And new lines are being added, new capacity, and we're part of that. And you're also seeing in this high tech manufacturing life savings nearshoring is these major tech companies building hubs outside of Silicon Valley, whether it be in Research Triangle Park, Texas, or Arizona. Again, places we're well positioned to take advantage of helping our customers. And again, you go to the government incentives. It's focused on getting skilled trade labor on the job that's trained the right way. We do that either through our union relationships or through skilled apprenticeship programs. And you have to understand how to work in a PLA, a prevailing wage world. We're expert at that. And our subsidiary CEOs, our segment leadership, and our corporate leadership knows how to put the right parameters around that to make sure that we comply with what we told our customers were so they qualify for the incentives that they want to receive. Then you move to the right, and again, part of that high-tech manufacturing is driven by AI and data center build-up. Go to data centers. We're really good, and we've been really good at this for a long period of time. We started this back in the early 2000s. There was a little bubble up in 2010-11. We kept that capability, and that leadership we have in our electrical and mechanical segments and some of our subsidiary leaders, they are world-class specialty contractors and data centers as is our fire life safety offering. So what's driving the band here? What's driving the band is us, right? We want more and more service. We, big companies like MCOR, are putting more and more things in the cloud, but also the proliferation of AI, and that needs more systems. These went from 5, 10, 15 megawatt facilities to 50, 80, 100 megawatt facilities. Let's put that in perspective. If you look at an office building or even a hospital complex, you look at a large hospital complex, that maybe is 5 to 10 megawatts. So think about what that one data center is using today to drive the things we need to be more productive or to outsource and get things into the cloud. Increase power requirements. Then you're going to go back to the remodel of some of the data centers that were built to uplift the power in there and also have different kinds of server racks. So we not only participate on the front end, electrically and mechanically in fire life safety, we also participate in what we call the day two work to allow it to receive the racking, and also finally in the retrofit and remodel. We've done a lot of work around these three top trends over the past year and a half, two years to understand long-term trends. We feel pretty good about where we're positioned. Go down to healthcare, MCOR has always been world-class hospital builders. it's hard to go into a major city that we're in and not know that we weren't part of that healthcare skyline. Whether it's the Texas Medical Center in Houston, whether it's Massachusetts General and the whole hospital complex out past Fenway in Boston, whether it's in San Diego, whether it's in Chicago, we're part of that healthcare skyline. And what we learned in COVID, those facilities need to be redone in many cases, also need to be made more flexible. And when you think about those healthcare facilities, They are rich, system-complex environments. They don't look, other than some of the high-purity things, which an operating room is, a lot different than these high-tech manufacturing and life science plants. There's a lot of commonality between that hospital build and high-tech manufacturing. And that allows me to talk about what we do. I talked about and started this. It was a resource allocation game at MCOR in figuring out where the best opportunities for us to perform, perform well, keep our workers safe and productive, and get superior results for our shareholders. And so a lot of the capabilities we build across these different boxes, we can use in the different boxes. And that is the wonderful thing about our skilled trades. That's the wonderful thing about our supervision and the engineering that we have at MCOR, which is more design assist, value engineering people that design to build, right? We figure out how to make it more buildable. And that's what BIM and prefabrication have allowed us to do. And last but not least, you get the energy efficiency and sustainability. I don't think any of us sit here and say, oh, yeah, I know energy prices are going down in the long term. That can't be true because you have an energy transformation going on coupled with this great demand coming out of things like high-tech facilities, data centers, electrification. They use a lot of energy. So energy efficiency is also for owners and energy security. People are concerned about reducing their emissions because it's not only in a lot of ways the right thing to do, It's the most cost-effective thing to do over the long term. And nobody does that better than our MCOR mechanical services businesses in building services, also partly in our mechanical construction business. Yeah, the lighting's good and all that. That's a given. But the complex things we can do around HVAC design and what we can do with building control systems, we do that world-class. We are one of the leading applied building controls companies in the country. and we can deliver superior results from mechanical solutions for our customers. And we've expanded our ability to do that with some recent acquisitions to talk about water and waste reduction, talk about the building envelope as part of someone else's drive to get facilities rationalization and energy efficiency. Sometimes you'll see these things coupled with an alternative energy solution or a co-gen solution where they'll add solar, they'll add a co-gen solution where you're taking steam and converting it into a cooling. or you're converting it into power. We have folks in the field, we have great engineers that know how to do that, that work within the built space to drive great energy efficiency and superior results for our customers and reduce their energy needs. So I could stop there, we could stop talking about the future, but we're gonna go now shift to page 13 and talk about RPOs and how that page, page 12, manifests itself into RPOs. I mean, ultimately, great trends, But if you don't know how to capitalize and turn it into projects, it really doesn't mean a whole lot. So you look on page 13, you can see the impact of those major trends in our RPOs. Total company RPOs at the end of 2023 were over $8.8 billion, up almost $1.4 billion, or almost 19%, over the December 2022 total of $7.5 billion. Additionally, fourth quarter project bookings were strong, with RPOs increasing $212 million from September 2020 30, 2023. Domestic construction services RPOs stand at 7.3 billion, a record, up 1.3 billion from December 2022, in line with strong project demand across most of the market sectors in which we operate. And then we've seen that throughout the year. Building services, which are anchored by energy efficiency projects and retrofit projects, ends 2023 with a healthy project pipeline and also exemplified by almost 1.3 billion of RPOs. RPOs by market sector show balance and market segmentation, bridging back to the previous page of organic growth trends in the marketplace. Looking into the actual activity, high-tech manufacturing, which includes semiconductor, pharma, biotech, life sciences, R&D, and the electric vehicle value chain stands at $1.5 billion, up $686 million, or 89%, from year-end 2022. Network and communications, which includes hyperscale data center work, stands at almost $1.6 billion, up $578 million, or 59% from December 31, 2022. Healthcare project demand continues to be strong, as we have over 1 billion healthcare RPOs, which is primarily made up of new hospital construction or expansion projects. We also currently have RPOs of nearly 650 million, in water and wastewater projects, which for us are predominantly located in Florida's Miami-Dade County and also the west coast of Florida from targeted projects from Tampa to Naples. Reshoring and nearshoring trends continue for our manufacturing and industrial customers, reflected in $808 million in project RPOs. During the year, we also saw increases in transportation and short-duration projects. Partially offsetting these RPOs were decreases in commercial, That's primarily driven by warehouse and hospitality projects. However, with respect to warehouses, we are seeing an uptick in activity for cold storage warehouses and upgrades in those cold storage warehouses for our fire and life safety services and projects as customers introduce more automation and change warehouse configuration. As the calendar moves into 2024, we continue to see strong multi-year growth characteristics in many of the market sectors we serve. our scale and operational excellence sets us apart from others in the marketplace and make our operating companies some of the most capable partners for our customers. As the diversity in our RPOs demonstrates, we have the flexibility and capability to move across these sectors to address trends in the markets as they arise. As we progress through 2024, the pace and compositions of RPOs may change based on the way our customers contract with us as we become more familiar and part of their site build-up. Once we are on a customer site, frequently or sometimes, Subsequent portions of the project at the site are awarded in scopes of work that are smaller than the initial award. And second, supply chain issues and lead times are now being factored into the initial planning, thus avoiding the previous delay that led to some of the buildup in RPOs, especially in building services. With respect to capital allocation, which I'm going to show to you on slide 14, our board has approved an increase in our quarterly dividend from $0.18 per share to $0.25 per share. We have a good acquisition pipeline and tend to use some of our firepower to execute deals. We recently signed definitive agreements to purchase a company in Texas and one in the greater Atlanta area, both of which add capabilities to our mechanical construction segment. We also bought a company or signed an agreement for a company, which will be a bolt-on for our mechanical services division. We expect to send around $140 million in aggregate upfront purchase price in connection with these acquisitions. We expect to close these acquisitions as we move further into 2024, and we'll take the opportunity to expand our capabilities and increase our geographic reach to better serve our customers when we can pursue companies with the right skills and culture. We like our pipeline of deals, but as I always said, deals happen when they happen. Now let's turn to page 15 and 16. Our exceptional performance in 2023 resulted in three meaningful guidance increases in 2023, as our operating margins strengthened throughout the year, primarily because we performed well and efficiently on difficult and complex projects. Some of these projects had favorable contract terms. And what that really means is we don't get into protracted disputes with our customers. We work to finish the job together. And we had some outstanding disputes that we successfully resolved in 2023. As we set guidance for 2024, it is important to remember what I mentioned earlier at the start of this call. We're coming off a three-year CAGR of nearly 28 percent, and we had 65 percent growth in earnings per share this past year. We do expect to continue to grow earnings for our shareholders this year. For 2024, we will set guidance at 13.5 to 14 billion revenues and 14 to 15 dollars in diluted earnings per share. Our guidance assumes strong operating margin performance. Our guidance assumes strong operating margin performance. As previously discussed, we start the year with excellent RPOs in our electrical and mechanical construction segments and a good base of RPOs in our mechanical services division within our U.S. building services segment. However, We have nearly $300 million in revenue headwinds in the U.S. and U.K. building services segment combined. That comes from the result of loss of facility services contract that we lost on re-bid despite strong customer scores on our service delivery. Despite this, we still expect low to mid single-digit revenue growth in U.S. building services. As reflected in our RPOs and as discussed previously, we continue to work and win work in important and strategic market sectors. We are executing our work with efficiency and precision as shown by our operating margins. We are utilizing BIM prefabrication and our labor and supply management capabilities with an eye towards delivering superior results for our customers and shareholders. However, as I stated in previous calls, It is important to remember that operating margins can fluctuate quarter to quarter based on mix, execution, and timing of projects. We evaluate our operating margin performance in terms of ranges over eight quarters, and our performance in 2023 yielded operating margins for most of our segments, which were at or above the high end of our historical ranges, especially in our mechanical construction segment. You know, we've shown great resilience in dealing with supply chain issues and continue to develop a strong bench from... performance through project managers to senior leadership. Further, we are attracting notable talent from skilled labor to senior project and operations management. Our outlook for 2024 is positive. And for our ability to achieve the upper end of our guidance range, macroeconomic factors and other factors will come into play potentially. We remain concerned with the financial risk to some customers around continued elevated interest rates and also the macro uncertainties posed by the U.S., the conflict and unrest in the Middle East, and their impact on global energy markets and supply chains, as well as the dysfunction occurring in the U.S. government, which may lead to a government shutdown or the inability to keep pieces of legislation. We also realize that our customers adjust the scope and timing of long-term projects consistent with their immediate, intermediate, and long-term capacity needs. Despite these challenges, We believe that we will be able to navigate these uncertainties as we have, as our team has shown great resiliency in the past. We remain cognizant of these external factors and the potential impact on our execution and performance. You know, we're going to continue to be balanced capital allocators. Specifically, as discussed previously, there remain opportunities within our acquisition pipeline, and we just increased our dividend to 25, quarterly dividend to 25 cents per share. We will continue to pursue opportunities to grow profitably, both organically and through acquisitions, and our share repurchase program remains in place. As I've said before, with the uncertainty in the financial markets, we believe that our strong balance sheet helps us work on large, sophisticated projects as customers see our financial strength as just another reason to choose MCOR. As always, I want to thank the entire MCOR team for their dedication and hard work. We appreciate all you do every day for our customers. With that, I'll turn it over to you, Alan, to open the line for questions.
spk09: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Brent Thielman of D.A. Davidson. Please go ahead.
spk03: Hey, thanks. Good morning. And Mark, Kevin, congrats on tremendous contributions and careers here. Tony, I heard you say twice, guidance assumes strong margin performance. I had heard you mention for quarters now, favorable contract terms. is at least sort of one factor here for the really strong margins that I don't imagine that's changing with the new work you're tucking into the business, but are those better terms broad based? Is it confined to a few of the really hot areas and markets within the business? Just love to hear you. Um, can we talk about that?
spk14: The better terms are mainly focused around liquidity in the project, uh, right. Cashflow, uh, keep the project moving. And that wouldn't be an issue with us, but we negotiate hard for those. Because the better the cash flow on the project is typically the project's moving well. Secondarily, the better terms are around, okay, if we're gonna expand scope, what's the method for which we're gonna expand scope so we don't get into these change order discussions that are extended and really affect productivity. Some of it's around general conditions, the realization that we want people to have the right general conditions. to be able to execute the project well. And finally, I think the better contractual terms around how things convert, whether they go from a fee-based contract, GMP, to a fixed price, and what would be the mechanism to do that? You put all that together, yeah, I think the larger the project right now, the more those terms are favorable both for the owner and for us, because it's a clear-eyed view of how we're gonna work together.
spk03: Okay, great. In comparing your RPOs to last year, the RPOs to be executed within a lot, the RPOs kind of beyond one year is down compared to that same number last year. I guess, Tony, the question is, is the response there, what you said in the opening commentary, that you may be on these customer sites already and so you can essentially return to work faster? Is there more to it than that?
spk14: No, that's basically it. coupled with the pace and timing of some of this large work. I mean, times money, especially in the data center space. And, you know, as a result, you have to be a big, sophisticated contractor that has the financial resources to mobilize on a site, be able to assemble a trained workforce with the right training on a job that might have been in planning. We get it. We may have a month and a half to mobilize. Within four months, we're at full production. And within nine months, some of these big data center jobs, what we do on the fit, the guts of it, are done. And then if you go to the other side of that, if you're already at a significant semiconductor site or an EV site or even a healthcare facility or any manufacturing site, there's a lot of work that has to get done initially to set the utility infrastructure. and mobilize and get everybody to say, okay, we're going to be here. But then as they build the other parts of the site, add tooling, other things, you may get that in an award that will build to something almost the same size in chunks that are 15 to 20% of what you'll ultimately overdo on that scope.
spk03: Got it. And then I thought it was employee headcount saw a bigger annual increase last year than we've seen since the onset of the pandemic for the company. I guess, Tony, do you feel like you have the right amount of kind of human capital to address the opportunities you see out there? Is it an impediment to you by any means? Just curious.
spk14: It hasn't been an impediment yet, Brett. We always say that we're always with an eye towards that. We've always had good success building it. The impediment actually, we'll find the skilled tradespeople. It's how quickly we can develop foreman, quickly developed project managers to move from being, you know, someone that was helping on the job or was an assistant foreman to move up to run big work. Likewise with project managers. We've also had pretty good success attracting, you know, when you're winning, people like to be beamed. And we've also had pretty good success attracting skilled foremen and project managers from other parts of the country when we're building out some of these sites, from other companies, and also from other industries.
spk03: Great. Just last one, Mark. The free cash conversion noticeably strong this year, just compared to the last five years, taking away 2020 COVID. But can we think this conversion rate can continue off the guidance you've given here?
spk17: Unfortunately not, Brent. I think, as Tony mentioned, with regards to some of our contract negotiations for some of our larger, more sophisticated work, we've been successful in making sure that You know, we're staying ahead of the curve with regards to being provided the necessary working capital to complete those jobs based on, you know, advanced billings and payments. You know, we cannot continue the cycle of collecting more cash than income earned. I don't think any company can. So I suspect 2024 is going to look more normal. So I think, you know, an appropriate benchmark would be, you know, 2022 or 2021. Plus or minus, yeah. And a lot of that, once again, not to sound like a broken record, is highly determined based on progression of work. But at the end of the day, we'd much rather be in the position we're currently in than on the other side of the curve with regards to trying to chase collections once a project's complete.
spk14: We've always looked at cash flow. If you're earning a net income, it means the business is in pretty good shape, right? And if we're in construction businesses, Jason, what do you think, 75%? 75% to 80%. Up income. That means our project portfolio is usually pretty good and that we don't have a lot of jobs that are eating cash because they're in some form of dispute or they're delayed or anything. So when you're overperforming like we did this year versus operating like Mark said, it's because specifically go to the mobilization we had on some of these big sites. we negotiate really hard up front to make sure that we're not having a big cash drain as we mobilize on these sites. And sometimes that takes a long time to negotiate that. And also sometimes we'll start on that, the one form of contract structure, and then over time that contract structure will change from a fee-based or T&M plus to more of a fixed price world because now we know what it costs to put labor on the site. We know the composition of the workforce we're going to work with for the next three or four or five years, hopefully. And then we know the... and the GCs and the engineering firms we're going to work with, how they get change orders done, how they get ads moved. And, you know, so we have great folks on the ground that know this art. It's not a science. It's an art, and they do it really well. And they've got a lot of experienced people helping quarterback that, and it's really the power of our corporate segment and subsidiary teams working together to bring that home on a site and to bring the cash flow home.
spk08: Tony, not to belabor the point, but when we look at kind of a normalized historical cash flow, right, over the last couple of years and we adjust for some of the impacts we saw with COVID, whether it was deferred FICA payments, I think a reasonable kind of historical average is somewhere between 70% and 80% of operating income on a consolidated basis.
spk14: Which gets you at net income or a little bit above.
spk08: Yeah.
spk14: Does that make sense, Brent?
spk19: That makes sense. Appreciate all the help. Thank you.
spk09: Okay. Our next question comes from Adam Salimer of Thompson Davis. Please go ahead.
spk06: Hey, good morning, guys.
spk09: Morning, Adam. Morning, Adam.
spk07: Mark, Kevin, I'm really sorry to see you go, but congrats on hugely successful careers at EME. Thank you. I guess I wanted to start on RPOs. So commercial is obviously down year over year, which is not a – So my question would be, do you think these other segments can continue to offset commercial weakness?
spk14: Well, I think, Adam, with guidance out of $13.5 to $14 billion, knowing that not all our revenue is in RPOs, we feel pretty strongly that these other trends will continue through the year. You know, as far as RPOs go, there could be fits and starts in the RPOs in some of these segments as work gets let. But we feel really good about page 12 and the underlying drivers of our business, and we think that we will continue to win. And the good news for us is we're balanced across market sectors. So as I talked about on page 12, the skilled trade, because these are complex projects, and when we share knowledge so well across our company on how to build and means and methods, that our supervision can deploy that skilled trades on any number of industries once they get going. And that's been the strength of MCOR over a long period of time, and we expect it to continue to be so. So the short answer is, I'll give you a shocking thing here, Adam. I think over the last seven, eight years, maybe a couple of mixed-use buildings, but as far as commercial skyscrapers where we were the core person doing the core build and shell and everything else was with that, not talking about tenant fit-out and commercial, I think we've built two, Mark, right? in nine years now. We have one underway right now that's really a delayed project from 2017, and it's going fine. But that's not been the heart of MCOR's business for a while. We still are big in the tenant fit-out place, which where we operate, I always like to say, we at MCOR operate and earn in the Class A office space for tenant fit-out and retrofits and everything. And we occupy, plus B and C space, because of the nature of what we do. So where we operate, we're fine, because that's still buoyant, a lot of movement. We're reconfiguring workspaces, new buildings. And then if you go to the other side of that, on the B and C space, quite frankly, it's not a bad time to be looking for space.
spk07: Tony, fire, life, safety, do you think it makes sense to break that out as a segment for... No, I don't think it does. I mean, clearly you're seeing good trends, and I'm curious on forward trends there.
spk14: Yeah, it's such an integral part of mechanical and how mechanical jobs are thought about, and it's such a part of our shops and everything. It would be hard to break out because it's ingrained in some of the companies and how they operate. That being said, it's an important part of our business, and it has a real success factor with our customers. deliver results on very complicated facilities across the country. Now, it has some unique characteristics that make it, on a trade delivery standpoint, it has a national union, right? Most trade businesses don't have a national union. Like the rest of the mechanical business, it's gravitated more toward prefab. Like the rest of the mechanical business, you have to have excellence in craft in the field and multi-discipline. They can do multi-size pipe and really engineering. So it also has more of a design assist element as the rest of the mechanical business has gravitated towards. So that's why it's so integral to that mechanical business. And it really wouldn't make sense to have it look different than the rest of the mechanical business.
spk07: Okay, and then just last one on data centers. One big tech company said, U.S. data center capacity, I think they said will double in the next five years. I'm just curious if their funnel kind of matches that comment.
spk14: We've done a lot of work around it. We think it grows high single digits to mid-teens for a while. So, yes.
spk09: Perfect. Thanks, guys. The next question comes from Alex Dwyer of KeyBank Capital Markets. Please go ahead.
spk11: Hi, guys. Congrats on the quarter, and congrats, Mark and Kevin, on the successful careers.
spk01: Thanks, Alan.
spk11: Hi. Can I just start off with the – can you talk about the semiconductor and the CHIPS Act opportunity set? So, like, we're seeing more – there's more grant funding coming to market in the past couple weeks and next coming weeks, but there's also been some major FAB project delays. I'm just wondering how we should think about the –
spk14: an option opportunity set over the next 12 months in light of these two diverging signals next 12 months good I mean it's next 12 months we have most of it already in RPOs and we know what the work will be doing on some of these critical sites when you think about the delays actually that's not bad for us in some cases we're building the infrastructure around that they have to staff them. It allows the sites to become much more after the initial build. They start to winnow down to the contractors that are the winners on that site that have done great work for them. On the sites that we are, we emphatically are those contractors.
spk11: And then how would you compare and contrast the semiconductor build-out versus the data center build-out in terms of the duration of the cycle and based on what you're hearing from your customers on discussions on plans. I'm just trying to wonder, is one a five-year cycle? Is one a 10-year cycle? Any thoughts on duration of the two cycles?
spk14: I don't really have. We're contractors. We tend to look at things in three to five-year cycles. And as we look at things over the next three to five years, we feel pretty good about that. Again, we can deploy our resources to the best opportunities. Secondarily, I'll give you a real-world case. If someone comes in And the semiconductor market is going to be strong in a market. We have our share of work. Maybe we're not even playing in the semiconductor market in that market. The rest of the work that happens around it, because there usually becomes a buoyant infrastructure that's part of that, whether it be warehousing, whether it be health care, the area tends to grow. We may do all those jobs and not do the semiconductor work. For us, it's a matter of resource allocation, how best to staff the jobs and what the best opportunities are. Data center, I said, again, both of them, we look really strong for the next three to five years. I would say the data center business is a much more stable business in how they're going to staff it. Think about a data center. They have to get the technology right, and a lot of them know how to do that, and they're thinking of new redesign. The data center human resource end of it is all on the construction side. The actual operating of the data center requires very few people. So once they get them up and running, it's much easier for them to think about capacity planning. Contrast that with the semiconductor world. Some of them have established workforces in some of these markets. They have a much easier time thinking about expansion and growing. For someone that comes in new the first time, they may hire one and a half workers to two workers for every one that's going to stick with them on the production side. The construction side, You know, there's a workforce that knows how to do that work after the first one. The construction folks aren't the issue. We would say that a, I don't want to say a slowdown, a more thoughtfully planned next three or four phases on that, once you get up and running, running leads to a much more orderly construction site. We know how to work together, and it goes on. We're all for them taking their time and getting them staffed correctly and becoming successful versus just build, build, build. It's better for us in our planning, it's better for them also. So, bullish on both, data center does not have the human resource issue after the fact that semiconductors does.
spk10: Thank you, very helpful.
spk09: Is that it? This concludes our question and answer session. I would like to turn the conference back over to Tony Guzzi for any closing remarks.
spk14: Thank you all. We look forward to hearing and working with you all in 2024. And with that, we now put a wrap on 2023.
spk09: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
spk00: you Thank you. Thank you. Thank you.
spk09: Good morning. My name is Alan, and I will be your conference operator today. At this time, I would like to welcome everyone to the MCOR Group fourth quarter and year end 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 the number one on your telephone keypad. If you would like to withdraw your question, please press star, then two. Please note, this event is being recorded. I'd like to hand things over to Mr. Blake Mueller with FDI Consulting. You may begin.
spk05: Thank you, Alan, and good morning, everyone. Welcome to the MCOR Group Conference Call. We are here today to discuss the company's 2023 fourth quarter and full year 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.
spk04: Kevin, please go ahead.
spk18: Thanks, Blake. 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 full year 2023. For those of you who are accessing the call via the Internet and our website, welcome to you as well. And you've arrived at the beginning of our slide presentation that will accompany our remarks today. We are on slide two. This presentation and certain forward-looking statements may also contain certain non-GAAP financial information. Page two describes in detail the forward-looking statements and the non-GAAP financial information disclosures. I encourage everyone to review both disclosures in conjunction with our discussion and accompanying slides. Slide three depicts the executives who are with me to discuss the quarter and full year 2023 results. They are Tony Guzzi, our Chairman, President, and Chief Executive Officer, Mark Pompa, Executive Vice President and Chief Financial Officer, Jason Nabandian, our Senior Vice President and Chief Accounting Officer, Maxine Mauricio, Chief Administrative Officer, Executive Vice President and General Counsel, and Andy Backman, Vice President, Investor Relations. 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 always find us at mcoregroup.com. And with that said, please let me turn to call over to Tony. Tony? Thanks, Kevin.
spk14: Good morning, and thank you for joining us for our 2023 full year and fourth quarter earnings call. Before we begin, though, I would like to recognize two of our executives, Mark Pompa and Kevin Matz. As we have previously announced, Mark and Kevin will close out two remarkable MCOR careers on April 1st. I want to thank them for their hard dedication hard work, dedication to MCOR, and you've been great teammates. I know they both share our excitement about the future at MCOR, as Jason will take the helm as our CFO. Andy will take over Kevin's investor relations responsibilities. I also want to recognize the promotion of Maxine Mauricio to Chief Administrative Officer, as she assumes some of the oversight duties previously held by Kevin. Thank you again to Kevin and Mark Congratulations to Jason and Maxine. And a continued warm welcome to Andy, who joined us this last fall. Now I'd like to turn you to page four to six, and that's where I'm going to start my comments. I'm going to focus most of my comments on our full year 2023 results. And Mark will go into more detail about our fourth quarter. We had a great fourth quarter at MCOR. We outperformed our expectations. earning $4.47 per share on $3.44 billion in revenue, which represented 16.2% organic revenue growth. Our fourth quarter operating margin was exceptional at 8.4%. Fourth quarter rounded out an excellent 2023 by any measure. We did have an incredible 2023 with revenue of $12.6 billion, representing growth of 13.6%, and organic revenue growth of 12.6%. Our earnings per share increased by approximately 65%, and our operating income of $875.8 million grew 55% over that of 2022. with record annual operating margin of 7.0%. Operating cash flow of $900 million represented a conversion in excess of 100% of operating income. You know, we had a lot go right for us in mCORN 2023, and this incredible performance is a testament to our leadership at all levels of our company, including our segment and subsidiary leaders who have delivered exceptional results for our customers, shareholders, and teammates over an extended period of time. Over the last three years, we have more than doubled our earnings per share with a compound annual growth rate of 28% in a difficult and uncertain business environment. Our teams drive our results by relentless focus on long-term growth, productivity and innovation, balanced capital allocation, and we live our MCOR values of mission first, people always, and they've been embraced throughout our company. We also have strong workforce training and development programs. We're fortunate to operate in large, growing market sectors like high-tech manufacturing, networking communications, manufacturing, and industrial. These sectors, as well as our energy retrofit projects, are benefiting from long-term secular trends that require excellence in specialty trade contracting. We have challenges, but we have met them and will continue to meet those challenges with resolve and with a strong, focused execution at every turn. We finished the year with our RPOs at an all-time high of $8.85 billion, which represents 2.5 percent sequential growth from September 30th, 2023, and 18.6 percent growth over the year-ago period. Now I'm going to proudly share some highlights from our segments. We had excellent performance in each of our mechanical and electrical construction and U.S. building services segment. Mechanical construction had an especially stellar 2023. The operating results of our industrial service segment continue to improve at a measured pace, and despite unfavorable economic conditions, our U.K. building services segment is reporting solid operating income and operating margins. The continued strength of our electrical mechanical construction segment is evidenced by 2023 revenue growth of 14.4 percent and 18.2 percent, respectively. With 2023 electrical construction operating margin of 8.3 percent and mechanical construction operating margin of 10.5 percent, the conversion from revenue to operating income by these segments has exceeded our expectations and really is a result of excellent execution, adaptability, smart project selection, and favorable contract terms. In the construction segments, we selected key market sectors, estimated, negotiated, and won meaningful projects, planned and executed such projects well, and safely deployed our highly skilled labor with strong productivity. Our teams have increased productivity by deploying BIM, or Building Information Modeling, and prefabrication at scale while sharing best practices on construction means and methods across our company. Said simply, we have learned from both our successes and failures, then deploy those learnings across our company to drive excellent results for our customers and superior financial returns for our shareholders. In our construction segments, we continue to win and complete some of the most sophisticated projects in markets such as high-tech manufacturing, which includes semiconductors, the EV value chain, biotech, life sciences, and pharmaceuticals. The network and communication sector, which encompasses our data center work, and the manufacturing sector, which is being driven by reshoring, domestic capacity expansion, and also includes the renewable energy projects we're working on, and we have continued to see growth in our healthcare sector. As a reminder, our mechanical product offering is broad across applications such as HVAC, process piping, plumbing, fire protection, and life safety. We are operating in key geographies where such projects are in process, and our life safety group has the capability to move across the country. We are positioned well with the right resources in the right market sectors and geographies to continue to win complex projects that allow us to perform well for our customers. Our electrical and mechanical construction teams have deep expertise in data center market which allows us to serve our customers with the right solution delivered under the most demanding schedules with excellent outcome for our customers. As I have mentioned on earlier calls, our segment and subsidiary management teams are leading in an exceptional way and allocating resources in a thoughtful and pragmatic way. We continue to strive to optimize our project mix to produce great financial results. Our U.S. building services segment continues its record of steady and impressive performance, and it has a strong mix of work across its service lines. This segment's revenues grew 13.3% in 2023, with an operating margin of 5.9%. Demand persists in our mechanical services division with excellent execution across retrofit projects, building controls, and maintenance and repairs. We are working across a variety of end markets, and our customers remain focused on energy efficiency, and indoor air quality upgrades. The mechanical services business drove the robust performance of this segment in 2023, due in large part, not due in large part, just due in part, to a strong repair service season this past summer as heat and humidity blanketed most parts of the country. The Site First Services Division continues to deliver, entering into multi-year facility maintenance contracts to leverage our self-performed operating model for skilled tradespeople and operating engineers. While opportunities for growth remain in this area, these facility services contracts take some time to ramp up, and the scope for these contracts can reduce, expand, or be terminated over time and upon rebid. We have seen some contract degradation as the real estate facility providers are especially aggressive on price and scope on some of these contracts as they are struggling in their commercial real estate businesses. However, we will remain disciplined and not take any low price, low opportunity contracts. Our industrial services segment improved in 2023 and had sustained performance improvement over the last two years. Operating income improved by nearly 80% in the year, albeit from a low base. We had more turnaround seasons in 2023 and we had strong results from our dish services like heater repair. We are experiencing greater levels of capital spending within our shop services division in the form of increased new-build heat exchanger orders and have benefited during the year from certain renewable fuel projects. We are just starting to see the resumption of demand for utility-scale solar projects currently impacted by supply chain and permitting issues. Our industrial service and electrical team has positioned well in the solar market, and that position should continue to improve. Our UK segment performed in a manner consistent with the available market opportunities in 2023, The competition on some contracts is fierce, as the UK economy is not strong. And similar to the US facility services market, we see the real estate companies bidding on contracts aggressively due to weakness in the UK commercial real estate market. However, we have a durable base of facility services contracts. We'll build on that base and serve our customers well. And though we experience a reduction in annual revenues in this segment, we are executing well as shown by the 5.9% operating margin for the year. Our balance sheet remains strong. It supports our organic growth, and it provides us with the capital needed to expand our prefabrication capabilities and investment in BIM, automation, and robotics. We also have the firepower to continue to make strategic acquisitions, and I'm going to discuss that in more detail later. With that, Mark, I'm going to turn it over to you. Great.
spk17: Tony, thank you for those kind words you said earlier, and good morning to everyone participating on our 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 2023 results, as well as a summary of our full-year performance, some of which Tony just 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. With that, let's begin our review of MCOR's fourth quarter. Consolidated revenues of $3.44 billion increased $489.4 million, or 16.6% from the fourth quarter of 2022. Each of our domestic reportable segments experienced revenue growth during the fourth quarter, which was the case for all four quarters of 2023. Revenues attributable to businesses acquired during the quarter were just under $11 million, so substantially all of our quarter-over-quarter revenue growth was due to organic activities. Our fourth quarter's consolidated revenues established a new all-time quarterly revenue record for the company and eclipses our previous record set during the third quarter of 2023. The specifics to each of our reportable segments' fourth quarter revenue performance is as follows. United States electrical construction segment revenues of 763.4 million increased 49.8 million or 7% from quarter four 2022. This segment continues to experience revenue growth across the majority of the market sectors that we serve with the most significant fourth quarter revenue increases being generated within the manufacturing and industrial and high tech manufacturing market sectors. Revenues of our United States mechanical construction segment of 1.47 billion increased 339.3 million or approximately 30% from the year-ago period. This segment experienced revenue growth across all market sectors in which we operate, with the most significant growth occurring within the high-tech manufacturing market sector. In addition, notable increases were seen within the manufacturing and industrial, network and communications, healthcare, and water and wastewater market sectors. As communicated throughout the year, Driven by customer projects supporting the design and manufacturing of semiconductors, as well as production and development of electric vehicles and or related battery technologies, this segment is experiencing strong demand for both fire and life safety, as well as traditional mechanical services. This is in conjunction with continued data center development, as well as the domestic reshoring of critical supply chain by certain of our customers, are the contributing factors to this segment's significant organic growth. Both our electrical and mechanical construction segments established new all-time quarterly revenue records with their fourth quarter performance. Revenues of MCOR's combined domestic construction segments totaled $2.24 billion for the fourth quarter of 2023, an increase of $389.1 million, or just over 21%. United States Building Services quarterly revenues of $802 million increased $88.6 million, or 12.4%. Excluding incremental acquisition contribution, this segment's revenues grew 10.9% organically, given increases across each of its operating divisions, with the most significant growth being generated by mechanical services. Within mechanical services, we are benefiting from strong demand for HVAC projects and retrofits, as well as building automation and control services. While customer initiatives to improve energy efficiency and our indoor air quality are certainly contributing to this demand, our opportunities remain broad-based and are further enhanced by mandated refrigerant phase-outs. In addition, our service volume continues to grow given an increase in our customer base as well as our geographic footprint. MCOR's industrial services segment revenues of $292.5 million increased $16.2 million, or 5.9%, quarter over quarter. This marks this segment's fourth consecutive quarter of top-line growth. In addition to more normal maintenance demand, we experienced the resumption in capital spending by our customers in the form of new built heat exchanger orders and participation in several renewable fuel projects. United Kingdom Building Services segment revenues of $108.8 million represents a reduction of $4.5 million, or 4%, from last year's fourth quarter. As referenced throughout 2023, this segment's revenues have declined due to the non-renewal of certain facilities maintenance contracts, which were still active in 2022, as well as a reduction in project work from certain of this segment's customers who slowed their capital spending programs in response to macroeconomic headwinds within the United Kingdom. Please turn to slide eight. Reported operating income for the quarter was $289.2 million, or 8.4% of revenues, and favorably compares to $177.2 million of operating income, or 6% of revenues, a year ago. Consistent with my revenue commentary, Our fourth quarter operating income and operating margin both established new all-time quarterly records for MCOR. This was achieved through increased operating income in each of our reportable segments, as well as expansion in operating margin in all but one of our segments. Specific fourth quarter operating performance by segment is as follows. Our U.S. electrical construction segment earned operating income of $76.3 million, an increase of $18.2 million, or 31.3% from the comparable 2022 period. The reported operating margin of 10% represents an improvement from 8.1% in last year's quarter. Increased gross profit and gross profit margin within the institutional, commercial, and high-tech manufacturing market sectors were the primary drivers of this improved performance. As a reminder, the results of this segment during the fourth quarter of 2022 were negatively impacted by certain discrete project lockdowns, which totaled $10 million and reduced this segment's operating margin by 140 basis points. in the 2022 fourth quarter. Operating income over United States mechanical construction services segment of $186.1 million represents a substantial increase of $81.3 million from last year's quarter. An operating margin of 12.6% represents an all-time high for this segment. Greater gross profit dollars and gross profit margin in the majority of market sectors in which we operate, driven by a favorable revenue mix, successful project closeouts, and better execution, were the factors behind this segment's improved performance. Operating income for U.S. building services was 42.1 million or 5.2% of revenues, which represents a 10.8% increase. The improved year-over-year performance was primarily due to the segment's mechanical services division, given the volume growth referenced during my revenue commentary, coupled with favorable execution on both their HVAC project and repair service activities. Our U.S. industrial services segment operating income of 12.6 million or 4.3% of revenues represents an increase of just over $11 million from the corresponding 2022 period. Led in the quarter by improved pricing within a shop services division, we are continuing to see operating margins of this segment move in an upward direction. UK Building Services is reporting operating income of $5.5 million, or 5% of revenues, which compares favorably to that of the prior year period. The decrease in the segment's revenues was more than offset by increased operating margin as the segment continues to execute well across its portfolio of facilities maintenance contracts and add-on project work. We are now on slide nine. Additional financial items of significance for the quarter not addressed on the previous slides are as follows. Quarter four gross profit of $617.7 million represents an all-time quarterly record for the company, and it is higher than the comparable 2022 period by approximately $163 million, or nearly 36%. Gross margin of 18% is improved to 260 basis points, period over period. Selling general and administrative expenses of $328.5 million represent 9.6% of revenues and reflect an increase of approximately $51 million from quarter four of 2022. SG&A for the current year's quarter includes $2.7 million of incremental expenses from businesses acquired, inclusive of intangible asset amortization, resulting in an organic increase of just over $48 million, which was largely driven by personnel costs. In addition to annual cost of living adjustments and greater employee benefit costs, our strong organic revenue growth has necessitated increased headcount across many of our businesses. Further, the operating income outperformance across the majority of our reportable segments during the fourth quarter and full year 2023 periods resulted in incremental incentive compensation expense. Diluted earnings per common share in the fourth quarter of 2023 is $4.47, compared to $2.63 per diluted share in the prior year. This fourth quarter EPS performance, like many of our financial metrics this quarter, eclipses MCOR's prior all-time quarterly diluted earnings per share record, which was previously established during the third quarter of 2023. Please turn to slide 10. With the quarterly commentary complete, I will now supplement Tony's comprehensive introductory remarks on MCOR's annual performance. Consolidated revenues of $12.6 billion represent an increase of $1.5 billion or 13.6% when compared to 2022. Our full year results include $107.1 million of incremental revenues attributable to businesses acquired pertaining to the time that such businesses were not owned by MCOR in 2022. Excluding the impact of acquisitions, annual revenues increased a strong 12.6% with all of our reportable segments, other than our United Kingdom Building Services segment, generating strong revenue growth during the full-year period. Operating income of $875.8 million, or 7% of revenues, represents a 55% increase from calendar year 2022, along with 190 basis point improvement in operating margin. Each of our domestic reportable segments, as Tony commented, achieved double-digit increases in full-year operating income, along with meaningful improvements in operating margins. Full year diluted earnings per share is $13.31 and compares to $8.10 in the corresponding 2022 period. Adjusting 2023 to exclude the third quarter impairment charge related to certain long-lived assets within our United States mechanical construction segment results in an adjusted non-GAAP diluted earnings per share of $13.34 for the year. This represents a 65% improvement over 2022's reported diluted EPS. Not surprising, with our strong performance throughout the last 12 months, full year 2023 represents a record year for MCOR, surpassing the company's previous all-time performance achieved in 2022. We are now in slide 11. The strength of MCOR's balance sheet continues to differentiate us from our competition and provides our customers with confidence as we bid on large-scale and demanding projects. Given our balance sheet, coupled with the borrowing capacity available to us under our recently amended and extended revolving credit facility, we remain well positioned to fund organic growth, pursue strategic M&A opportunities, and return capital to shareholders. Our commitment to shareholder return is evidenced in part by today's announcement that our Board of Directors has approved an increase in our quarterly dividend of almost 40%. Notable fluctuations in our balance sheet when compared to December of 2022 are as follows. Cash on hand is $790 million and represents an increase of just over $333 million. Our exceptional operating cash flow performance of $900 million, which Tony commented on earlier, was partially offset by cash used for financing activities of just over $412 million, given the repayment of all amounts previously outstanding under our term loan and the return of $160 million to stockholders through share repurchases and dividends. as well as cash use and investing activities of $161 million for acquisitions and capital expenditures. Resulting primarily from the increase in cash just referenced, our working capital balance has increased by just over $220 million from December of last year. Goodwill has increased by $37.4 million as a result of the eight acquisitions completed by us in calendar 2023, while net identifiable and tangible assets have decreased by $7.9 million as the additional intangible assets recognized in connection with these acquisitions was more than offset by $67.1 million of annual taxation expense in 2023. The total debt exclusive of operating lease liabilities has decreased by $241.9 million, almost entirely as a result of the aforementioned repayments made on our previously outstanding term loan. After considering outstanding letters of credit, there remains $1.2 billion of capacity available to us under our renewed $1.3 billion revolving credit facility, the maturity of which now has been extended to December of 2028. Our stockholders' equity balance has increased by almost $500 million as our net income for the year exceeded our share repurchases and dividend payments made throughout 2023. MCOR's debt-to-capitalization ratio has reduced to 0.2% from 11.1% at year-end to 2022, given the full repayment of our term loan as well as the increase in stockholders' equity, both of which I just referenced. With my portion of this morning's prepared comments complete, I will now give the call, thankfully, back to Tony. Thanks, Mark.
spk14: And I'm going to start on page 12. And what you really can think of this, the way we talk about earnings, is we just talked about everything that happened in the past, and this next section is all about the future. And if you go to page 12, we've talked about this chart probably about three quarters ago we started talking about it. And I look at this as a resource allocation chart. It not only informs how we allocate resources to drive organic growth, but this chart also informs our capital allocation decisions, which we'll talk about later. So you think about this chart and moving left to right, and it'll be some intermixing. The first part is the electrification EV value chain. It's a trend, and there's been a lot in the news lately about what's happening, is it stalling and all that. In our world, it's not right now because of where we played. For us, it's mainly been about fire life safety and utility scale charging stations, and now solar is starting to come back up on the radar. But the way I think about this, this is a major transformation, whether EVs and the electrification hits 10% of vehicles, whether it hits 15% of vehicles, whether it hits 30%. And clearly, the policy got a little ahead of the technology here, but that's okay. At the end of the day, all these facilities will be built. Some of them, the battery infrastructure is going to have to be built, again, no matter what penetration it has. It's a lot more than it is today. And the utility-scale charging stations that we participated in, these are at major hubs of transportation. And some of this is well underway because it makes sense, especially for delivery vehicles and other things that have lighter weights. The solar is just starting to reengage in our part of the world. And we do that mainly in electrical. We do that some in the electrical segment, some in the sub-utility scale in building services, and we'll talk about that later. But then at scale, we do it in industrial services through our electrical business there. We have great capability there. And it's also supported by the IRA and government incentives. And we are privileged to be able to either do that with union labor where applicable, or we have the necessary prevailing wage experience, and apprenticeship programs in the non-union world to be able to do that. And you'll hear that theme across some of these trends. Then you get to the high-tech manufacturing. So look, me on electrification EV value chain, pretty good market. What we're building, we're going to continue to build. All big markets go through periods of up and down, but the long-term trend, I think, is intact. And again, whether it's 7%, 15%, or 30%, there's a lot of facilities, a lot of utility-scale charging that needs to happen. And if we just get a share of the solar market going forward, we'll see that in our industrial services segment. You go to high-tech manufacturing life sciences, and you really got to look at this box and draw a little loop down to reshoring and nearshoring. We learned in COVID that supply chains weren't as resilient as they should be. I don't think we learned that. We probably knew that, but we needed to have a lesson like that. So we're seeing our customers move their supply chains back onshore. This was happening even before COVID because the wage differential versus the transportation and the uncertainty of transportation was not what it was. And automation allows you to make up for a lot of that wage differential. But you're really seeing it. The semiconductor manufacturing, which we're such a big part of, And we've expanded where we can do that. We only could do that in a couple markets before. Now we can do that and double that number. So maybe we were two before. Now we're four to six. And that is, for us, weighted towards mechanical. But electrical, we still do that work there. And fire life safety. So we represented all trades, but weighted more towards mechanical. And you see that in our RPOs. And you've got the pharma, biotech, life sciences. Again, there's two things happening there. There's reshoring. And we're in a lot of the right markets to make that happen, whether it's the Carolinas, parts of California, Indiana, or New Jersey. But there's also an explosion of new drugs, specifically around weight loss. And new lines are being added, new capacity, and we're part of that. And you're also seeing in this high-tech manufacturing life savings nearshoring is these major tech companies building hubs outside of Silicon Valley, whether it be in Research Triangle Park, Texas, or Arizona. Again, places we're well positioned to take advantage of helping our customers. And again, you go to the government incentives. It's focused on getting skilled trade labor on the job that's trained the right way. We do that either through our union relationships or through skilled apprenticeship programs. And you have to understand how to work in a PLA, a prevailing wage world. We're expert at that. And our subsidiary CEOs, our segment leadership, and our corporate leadership knows how to put the right parameters around that to make sure that we comply with what we told our customers were so they qualify for the incentives that they want to receive. Then you move to the right, and again, part of that high-tech manufacturing is driven by AI and data center build-up. Go to data centers. We're really good, and we've been really good at this for a long period of time. We started this back in the early 2000s. There was a little bubble up in 2010, 11. We kept that capability, and that leadership we have and our electrical and mechanical segments, and some of our subsidiary leaders, they are world-class specialty contractors and data centers, as is our fire and life safety offering. So what's driving demand here? What's driving demand is us, right? We want more and more service. We, big companies like MCOR, are putting more and more things in the cloud, but also the proliferation of AI, and that needs more systems. These went from 5, 10, 15 megawatt facilities, to 50, 80, 100 megawatt facilities. Let's put that in perspective. If you look at an office building or even a hospital complex, you look at a large hospital complex, that maybe is five to 10 megawatts. So think about what that one data center is using today to drive the things we need to be more productive or to outsource and get things into the cloud. Increased power requirements. Then you're gonna go back to the remodel of some of the data centers that were built to uplift the power in there and also have different kinds of server racks. So we not only participate on the front end, electrically and mechanically in fire life safety, we also participate in what we call the day two work to allow it to receive the racking and also finally in the retrofit and remodel. We've done a lot of work around these three top trends over the past year and a half, two years to understand long-term trends. We feel pretty good about where we're positioned. Go down to healthcare, MCOR has always been world-class hospital builders. It's hard to go into a major city that we're in and not know that we weren't part of that healthcare skyline. Whether it's the Texas Medical Center in Houston, whether it's Massachusetts General and the whole hospital complex out past Fenway in Boston, whether it's in San Diego, whether it's in Chicago, we're part of that healthcare skyline. And what we learned in COVID, those facilities need to be redone in many cases. also need to be made more flexible. And when you think about those health care facilities, they are rich system complex environments. They don't look, other than some of the high purity things, which an operating room is, a lot different than these high tech manufacturing and life science plants. There's a lot of commonality between that hospital build and high tech manufacturing. And that allows me to talk about what we do. I talked about and started, this was a resource allocation game at MCOR, in figuring out where the best opportunities for us to perform, perform well, keep our workers safe and productive, and get superior results for our shareholders. And so a lot of the capabilities we build across these different boxes, we can use in the different boxes. And that is the wonderful thing about our skilled trades. That's the wonderful thing about our supervision and the engineering that we have at MCOR, which is more design assist, value engineering people that design to build, right? We figure out how to make it more buildable. And that's what BIM and prefabrication have allowed us to do. And last but not least, you get the energy efficiency and sustainability. I don't think any of us sit here and say, oh, yeah, I know energy prices are going down in the long term. That can't be true because you have an energy transformation going on, coupled with this great demand coming out of things like high-tech facilities, data centers, electrification. They use a lot of energy. So energy efficiency is also for owners and energy security. People are concerned about reducing their emissions. Because it's not only, in a lot of ways, the right thing to do, it's the most cost-effective thing to do over the long term. And nobody does that better than our MCOR mechanical services businesses in building services, also partly in our mechanical construction business. Yeah, the lighting's good and all that. That's a given. But the complex things we can do around HVAC design and what we can do with building control systems, we do that world-class. We are one of the leading... applied building controls companies in the country. And we can deliver superior results from mechanical solutions for our customers. And we've expanded our ability to do that with some recent acquisitions to talk about water and waste reduction, talk about the building envelope as part of someone's else drive to get facilities rationalization and energy efficiency. Sometimes you'll see these things coupled with an alternative energy solution or a co-gen solution where they'll add solar, they'll add a co-gen solution where you're taking steam and converting it into a cooling, or you're converting it into power. We have folks in the field, we have great engineers that know how to do that, that work within the built space to drive great energy efficiency and superior results for our customers and reduce their energy needs. So I could stop there, we could stop talking about the future, but we're going to go now shift to page 13 and talk about RPOs and how that page, page 12, manifests itself into RPOs. I mean, ultimately, great trends, but if you don't know how to capitalize and turn it into projects, it really doesn't mean a whole lot. So you look on page 13, you can see the impact of those major trends in our RPOs. Total company RPOs at the end of 2023 were over $8.8 billion, up almost $1.4 billion, or almost 19%, over the December 2022 total of $7.5 billion. Additionally, Fourth quarter project bookings were strong with RPOs increasing $212 million from September 30, 2023. Domestic construction services RPOs stand at $7.3 billion, a record of $1.3 billion from December 2022, in line with strong project demand across most of the market sectors in which we operate. And then we've seen that throughout the year. Building services, which are anchored by energy efficiency projects and retrofit projects, ends 2023 with a healthy project pipeline and also exemplified by almost 1.3 billion of RPOs. RPOs by market sector show balance and market segmentation, bridging back to the previous page of organic growth trends in the marketplace. Looking into the actual activity, high-tech manufacturing, which includes semiconductor, pharma, biotech, life sciences, R&D, and the electric vehicle value chain stands at $1.5 billion, up $686 million, or 89% from year-end 2022. Network and communications, which includes hyperscale data center work, stands at almost $1.6 billion, up $578 million, or 59% from December 31, 2022. Healthcare project demand continues to be strong, as we have over 1 billion healthcare RPOs. which is primarily made up of new hospital construction or expansion projects. We also currently have RPOs of nearly $650 million in water and wastewater projects, which for us are predominantly located in Florida's Miami-Dade County and also the west coast of Florida from targeted projects from Tampa to Naples. Reshoring and nearshoring trends continue for our manufacturing and industrial customers, reflected in $808 million in project RPOs. During the year, we also saw increases in transportation and short-duration projects. Partially offsetting these RPOs were decreases in commercial that's primarily driven by warehouse and hospitality projects. However, with respect to warehouses, we are seeing an uptick in activity for cold storage warehouses and upgrades in those cold storage warehouses for our fire and life safety services and projects as customers introduce more automation and change warehouse configurations. As the calendar moves into 2024, we continue to see strong multi-year growth characteristics in many of the market sectors we serve. Our scale and operational excellence sets us apart from others in the marketplace and make our operating companies some of the most capable partners for our customers. As the diversity in our RPOs demonstrates, we have the flexibility and capability to move across these sectors to address trends in the markets as they arise. As we progress through 2024, the pace and compositions of RPOs may change. based on the way our customers contract with us as we become more familiar and part of their site buildup. Once we are on a customer site, frequently or sometimes, subsequent portions of the project at the site are awarded in scopes of work that are smaller than the initial award. And second, supply chain issues and lead times are now being factored into the initial planning, thus avoiding the previous delay that led to some of the buildup in RPOs, especially in building services. With respect to capital allocation, which I'm going to show to you on slide 14, Our board has approved an increase in our quarterly dividend from 18 cents per share to 25 cents per share. We have a good acquisition pipeline and tend to use some of our firepower to execute deals. We recently signed definitive agreements to purchase a company in Texas and one in the greater Atlanta area, both of which add capabilities to our mechanical construction segment. We also bought a company or signed an agreement for a company, which will be a bolt-on for our mechanical services divisions. We expect to send around $140 million in aggregate upfront purchase price in connection with these acquisitions. We expect to close these acquisitions as we move further into 2024, and we'll take the opportunity to expand our capabilities and increase our geographic reach to better serve our customers when we can pursue companies with the right skills and culture. We like our pipeline of deals, but as I've always said, deals happen when they happen. Now let's turn to page 15 and 16. Our exceptional performance in 2023 resulted in three meaningful guidance increases in 2023 as our operating margins strengthened throughout the year, primarily because we perform well and efficiently on difficult and complex projects. Some of these projects had favorable contract terms. And what that really means is we don't get into protracted disputes with our customers. We work to finish the job together. and we had some outstanding disputes that we successfully resolved in 2023. As we set guidance for 2024, it is important to remember what I mentioned earlier at the start of this call. We're coming off a three-year CAGR of nearly 28 percent, and we had 65 percent growth in earnings per share this past year. We do expect to continue to grow earnings for our shareholders this year. For 2024, we will set guidance at 13.5 to $14 billion revenues and $14 to $15 in diluted earnings per share. Our guidance assumes strong operating margin performance. Our guidance assumes strong operating margin performance. As previously discussed, we start the year with excellent RPOs in our electrical and mechanical construction segments and a good base of RPOs in our mechanical services division within our U.S. building services segment. However, we have nearly $300 million in revenue headwinds in the U.S. and U.K. building services segment combined. That comes from the result of loss of facility services contract that we lost on rebid despite strong customer scores on our service delivery. Despite this, we still expect low to mid-single-digit revenue growth and U.S. building services. As reflected in our RPOs and as discussed previously, we continue to work and win work in important and strategic market sectors. We are executing our work with efficiency and precision as shown by our operating margins. We are utilizing BIM prefabrication and our labor and supply management capabilities with an eye towards delivering superior results for our customers and shareholders. However, as I've stated in previous calls, it is important to remember that operating margins can fluctuate quarter to quarter based on mix execution and timing of projects. We evaluate our operating margin performance in terms of ranges over eight quarters, and our performance in 2023 yielded operating margins for most of our segments which were at or above the high end of our historical ranges, especially in our mechanical construction segment. You know, we've shown great resilience in dealing with supply chain issues and continue to develop a strong bench from performance through project managers to senior leadership. Further, we are attracting notable talent from skilled labor to senior project and operations management. Our outlook for 2024 is positive. And for our ability to achieve the upper end of our guidance range, macroeconomic factors and other factors will come into play potentially. We remain concerned with the financial risk to some customers around continued elevated interest rates and also the macro uncertainties posed by the conflict and unrest in the Middle East and their impact on global energy markets and supply chains, as well as the dysfunction occurring in the U.S. government, which may lead to a government shutdown or the inability to keep pieces of legislation. We also realize that our customers adjust the scope and timing of long-term projects consistent with their immediate, intermediate, and long-term capacity needs. Despite these challenges, we believe that we will be able to navigate these uncertainties as we have, as our team has shown great resiliency in the past. We remain cognizant of these external factors and the potential impact on our execution and performance. You know, we're going to continue to be balanced capital allocators. Specifically, as discussed previously, there remain opportunities within our acquisition pipeline and we just increased our dividend to 25, quarterly dividend to 25 cents per share. We will continue to pursue opportunities to grow profitably, both organically and through acquisitions, and our share repurchase program remains in place. As I've said before, with the uncertainty in the financial markets, we believe that our strong balance sheet helps us work on large, sophisticated projects, as customers see our financial strength as just another reason to choose MCOR. As always, I want to thank the entire MCOR team for their dedication and hard work. We appreciate all you do every day for our customers. With that, I'll turn it over to you, Alan, to open the line for questions.
spk09: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from Brent Thielman of DA Davidson. Please go ahead.
spk03: Hey, thanks. Good morning, and Mark, Kevin, congrats on tremendous contributions and careers here. Tony, I heard you say twice, guidance assumes strong margin performance. I had heard you mention for a quarters now, favorable contract terms is at least sort of one factor here for the really strong margins. I don't imagine that's changing with the new work you're tucking into the business. But are those better terms broad-based? Is it confined to a few of the really hot areas and markets within the business? Just love to hear you talk about that.
spk14: Well, the better terms are mainly focused around liquidity in the project, right, cash flow. Keep the project moving, and that wouldn't be an issue with us, but we negotiate hard for those because the better the cash flow on the project is typically the project's moving well. Secondarily, the better terms are around, okay, if we're going to expand scope, what's the method for which we're going to expand scope so we don't get into these change order discussions that are extended and really affect productivity. Some of it's around general conditions, the realization that we want people to have the right general conditions to be able to execute the project well. And finally, I think the better contractual terms around how things convert, whether they go from a fee-based contract, GMP, to a fixed price, and what would be the mechanism to do that. You put all that together, yeah, I think the larger the project right now, the more those terms are favorable both for the owner and for us. Because it's a clear-eyed view of how we're going to work together. Okay, great.
spk03: And then in comparing your RPOs to last year, the RPOs to be executed within a lot, the RPOs kind of beyond one year's down compared to that same number last year. And I guess, Tony, the question is, is the response there what you said in the opening commentary that you may be on these customer sites already and so you can essentially sort of turn the work faster? Is there more to it than that?
spk14: No, that's basically it, coupled with the pace and timing of some of this large work. I mean, times money, especially in the data center space. And, you know, as a result, you have to be a big, sophisticated contractor that has the financial resources to mobilize on a site, be able to assemble a trained workforce with the right training on a job that might have been in planning, we get it, we may have a month and a half to mobilize. Within four months, we're at full production. And within nine months, some of these big data center jobs, what we do on the fit, the guts of it, are done. And then if you go to the other side of that, if you're already at a significant semiconductor site or an EV site or even a healthcare facility, or any manufacturing site, there's a lot of work that has to get done initially to set the utility infrastructure and mobilize and get everybody to say, okay, we're going to be here. But then as they build the other parts of the site, add tooling, other things, you may get that in an award that will build to something almost the same size in chunks that are 15% to 20% of what you'll ultimately overdo on that scope. Got it.
spk03: And then I thought it was... Employee headcount saw a bigger annual increase last year than we've seen since the onset of the pandemic for the company. I guess, Tony, do you feel like you have the right amount of human capital to address the opportunities you see out there? Is it an impediment to you by any means?
spk14: It hasn't been an impediment yet, Brett. We always say that we're always with an eye towards that. We've always had good success building it. The impediment, actually, we'll find the skilled tradespeople. It's how quickly we can develop foremen, how quickly we can develop project managers to move from being, you know, someone that was helping on the job or was an assistant foreman to move up to run big work. Likewise with project managers. We've also had pretty good success attracting, you know, when you're winning, people like to be beat. And we've also had pretty good success attracting skilled foremen and project managers from other parts of the country when we're building out some of these sites from other companies. and also from other industries.
spk03: Great. Just last one, Mark. The free cash conversion noticeably strong this year, just compared to the last five years, taking away 2020 COVID. But can we think this conversion rate can continue off the guidance you've given here?
spk17: Unfortunately not, Brent. I think, as Tony mentioned, with regards to Some of our contract negotiations were some of our larger, more sophisticated work. We've been successful in making sure that we're staying ahead of the curve with regards to being provided the necessary working capital to complete those jobs based on advanced billings and payments. We cannot continue the cycle of collecting more cash than income earned. I don't think any company can. So I suspect 2024 is going to look more normal. So I think an appropriate benchmark would be 2022 or 2021. Plus or minus, yeah. And a lot of that, once again, not to sound like a broken record, is highly determined based on progression of work. But at the end of the day, we'd much rather be in the position we're currently in than on the other side of the curve with regards to trying to chase collections once a project's complete.
spk14: We've always looked at cash flow, you know, if you're earning in net income, it means the business is in pretty good shape, right? And if we're in construction businesses, Jason, what do you think, 75%? 75% to 80%. Up income. That means our project portfolio is usually pretty good and that we don't have a lot of, you know, jobs that are eating cash because they're in some form of dispute or they're delayed or anything. So when you're overperforming like we did this year versus operating like Mark said, it's because specifically go to the mobilization we had on some of these big sites. We negotiate really hard up front to make sure that we're not having a big cash drain as we mobilize on these sites. And sometimes that takes a lot of time to negotiate that. And also sometimes we'll start on that, the one form of contract structure, and then over time that contract structure will change from a fee-based or T&M plus to more of a fixed price world because now we know what it costs to put labor on the site We know the composition of the workforce we're going to work with for the next three or four or five years, hopefully. And then we know the owner and the GCs and the engineering firms we're going to work with, how they get change orders done, how they get ads moved. And, you know, so we have great folks on the ground that know this art. It's not a science. It's an art. And they do it really well. And they've got a lot of experienced people helping quarterback that. And it's really this power of our corporate segment and subsidiary teams working together to bring that home on a site and to bring the cash flow home.
spk08: Tony, not to belabor the point, but when we look at kind of a normalized historical cash flow, right, over the last couple of years and we adjust for some of the impacts we saw with COVID, whether it was deferred FICA payments, I think a reasonable kind of historical average is somewhere between 70% and 80% of operating income on a consolidated basis.
spk14: Would you get you at net income or a little bit above?
spk08: Yeah.
spk14: Does that make sense, Brent?
spk19: That makes sense. Appreciate all the help. Thank you. Okay.
spk09: Our next question comes from Adam Salimer of Thompson Davis. Please go ahead.
spk06: Hey, good morning, guys.
spk09: Morning, Adam. Morning, Adam.
spk07: Mark, Kevin, I'm really sorry to see you go, but congrats on hugely successful careers at EME. Thank you. I guess I wanted to start on RPOs, so commercial is obviously down year over year, which is not a... So my question would be, do you think these other segments can continue to offset commercial weakness?
spk14: Well, I think, Adam, with guidance out of $13.5 to $14 billion, knowing that not all our revenues in RPOs, we feel pretty strongly that these other trends will continue through the year. Uh, you know, as far as RPOs go, there could be fits and starts in the RPOs and some of these segments as work gets let, but we feel really good about page 12 and the underlying drivers of our business. And we think that we will continue to win. And the good news for us is we're balanced across market sectors. Uh, so as I talked about on page 12, you know, the skilled trade, because these are complex projects. And when we share knowledge so well across our company on how to build and means and methods, that our supervision can deploy that spill trades on any number of industries once they get going. And that's been the strength of MCOR over a long period of time, and we expect it to continue to be so. So the short answer is, I'll give you a shocking thing here, Adam. I think over the last seven, eight years, maybe a couple of mixed-use buildings, but as far as commercial skyscrapers where we were the core person doing the core building shell and everything else that goes with that, not talking about tenant fit-out and commercial, I think we've built two, Mark, right, in nine years now. We have one underway right now that's really a delayed project from 2017, and it's going fine. But that's not been the heart of MCOR's business for a while. We still are big in the tenant fit-out place, which where we operate, I always like to say, we at MCOR operate and earn in the Class A office space for tenant fit-on, retrofits, and everything. And we occupy Class B and C space because of the nature of what we do. So where we operate, we're fine because that's still buoyant. A lot of movement. We're reconfiguring workspaces, new buildings. And then if you go to the other side of that, on the B and C space, quite frankly, it's not a bad time to be looking for space.
spk07: Tony fire life safety. Do you think it makes sense to break that out as a segment for, for us? I mean, clearly you're seeing good trends and I'm just, I'm curious on, you know, forward trends there.
spk14: Uh, you know, it's, it's such an integral part of mechanical and how mechanical jobs thought about. And it's such a part of our, of our shops and everything. It would be hard to break out because it's ingrained in some of the companies and how they operate. That being said, you know, it's an important part of our business and, uh, It has a real success factor with our customers to deliver results on very complicated facilities across the country. Now it has some unique characteristics that make it, on a trade delivery standpoint, it has a national union, right? Most trade businesses don't have a national union. Like the rest of the mechanical business, it's gravitated more toward prefab. Like the rest of the mechanical business, You have to have excellence in craft in the field and multidiscipline. They can do multi-size pipe and really engineering. So it also has more of a design assist element as the rest of the mechanical business has gravitated towards. So that's why it's so integral to that mechanical business, and it really wouldn't make sense to have it look different than the rest of the mechanical business.
spk07: Okay, and then just last one on data centers. One big tech company said U.S. data center capacity, I think they said will double in the next five years. I'm just curious if their funnel kind of matches that comment.
spk14: We've done a lot of work around it. We think it grows high single digits to mid-teens for a while. So, yes.
spk09: Perfect. Thanks, guys. The next question comes from Alex Dwyer of KeyBank Capital Markets. Please go ahead.
spk11: Hi, guys. Congrats on the quarter, and congrats, Mark and Kevin, on the successful careers.
spk01: Thanks, Alex.
spk11: Hi. Can I just start off with, can you talk about the semiconductor and the CHIPS Act opportunity set? So, like, we're seeing more, there's more grant funding coming to market in the past couple weeks and next coming weeks, but there's also... been some major FAB project delays. I'm just wondering how we should think about the opportunity set over the next 12 months in light of these two diverging signals.
spk13: Next 12 months? Good.
spk14: I mean, it's next 12 months. We have most of it already in RPOs. And we know what the work will be doing on some of these critical sites. When you think about the delays, actually, that's not bad for us in some cases. We're building the infrastructure around that. They have to staff them. It allows the sites to become much more after the initial build. They start to winnow down to the contractors that are the winners on that site that have done great work for them. On the sites that we are, we emphatically are those contractors.
spk11: And then how would you compare and contrast the semiconductor build-out versus the data center build-out in terms of the duration of the cycle and based on what you're hearing from your customers on... discussions on plans. I'm just trying to wonder, is one a five-year cycle? Is one a 10-year cycle? Any thoughts on duration of the two cycles?
spk14: I don't really have. We're contractors. We tend to look at things in three to five-year cycles. And as we look at things over the next three to five years, we feel pretty good about that. Again, we can deploy our resources to the best opportunities. Secondarily, I'll give you a real-world case. If someone comes in And the semiconductor market is going to be strong in a market. We have our share of work, or maybe we're not even playing in the semiconductor market in that market. The rest of the work that happens around that, because there usually becomes a buoyant infrastructure that's part of that, you know, whether it be warehousing, whether it be health care, the area tends to grow. We may do all those jobs and not do the semiconductor work. For us, it's a matter of resource allocation, how best to staff the jobs and what the best opportunities are. Data center, I said, again, both of them, we look really strong for the next three to five years. I would say the data center business is a much more stable business in how they're going to staff it. Think about a data center. They have to get the technology right, and a lot of them know how to do that, and they're thinking of new redesign. The data center human resource end of it is all on the construction side. The actual operating of the data center requires very few people. So once they get them up and running, it's much easier for them to think about capacity planning. Contrast that with the semiconductor world. Some of them have established workforces in some of these markets. They have a much easier time thinking about expansion and growing. For someone that comes in new the first time, they may hire one and a half workers to two workers for every one that's going to stick with them on the production side. The construction side, You know, there's a workforce that knows how to do that work after the first one. The construction folks aren't the issue. We would say that a, I don't want to say a slowdown, a more thoughtfully planned next three or four phases on that, once you get up and running, leads to a much more orderly construction site. We know how to work together, and it goes on. We're all for them taking their time and getting them staffed correctly and becoming successful versus just build, build, build. It's better for us in our planning, it's better for them also. So, bullish on both, data center does not have the human resource issue after the fact that semiconductors does.
spk10: Thank you, very helpful.
spk09: Is that it? This concludes our question and answer session. I would like to turn the conference back over to Tony Aguzzi for any closing remarks.
spk14: Thank you all. We look forward to hearing and working with you all in 2024. And with that, we now put a wrap on 2023.
spk09: The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.
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