Sequential margin decline and project mix
Q: Adam Thalhimer of Thompson, Davis asked for color on the sequential margin decline and the outlook for future quarters.
A: Trent McKenna explained that a higher proportion of equipment and materials in the cost mix dampened margins despite revenue growth. Bill George added that purchase adjustments from acquisitions and the early-stage nature of large projects also contributed to the decline.
Q: Adam Thalhimer of Thompson, Davis asked when the project portfolio might mature.
A: Bill George explained that profit visibility improves as projects reach 40% to 60% completion, and he expects margins to return to average in the first half of 2027.
Backlog drivers and new customers
Q: Adam Thalhimer of Thompson, Davis asked if the strong bookings are driven by traditional data center customers or new ones.
A: Trent McKenna noted that both existing and new customers are driving demand, with customers committing earlier due to scarce capacity. Brian Lane added that repeat business from sophisticated customers is a key driver.
Modular business capacity and strategy
Q: Adam Bubes of Goldman Sachs asked about the 6 million square feet capacity target and engagement with new customers like Frontier lab and colocation providers.
A: Trent McKenna clarified the 6 million square feet target is based on existing programmatic customers. Brian Lane explained they are cautious about new customers, prioritizing financial strength and payment terms before committing to programmatic arrangements.
Q: Adam Bubes of Goldman Sachs asked about core execution and margin expansion.
A: Bill George clarified that while they do not explicitly forecast margin expansion, the underlying business drivers remain strong and gross profit per hour worked continues to improve.
Backlog composition and duration
Q: Sangita Jain of KeyBanc asked for a breakdown of the mechanical backlog jump.
A: Bill George stated that backlog is lumpy and there is no specific trend difference between segments. Brian Lane confirmed the activity level is the strongest he has seen.
Q: Sangita Jain of KeyBanc asked about the duration of the backlog.
A: Brian Lane noted that project durations have extended to roughly 18 to 24 months compared to 9 months in the past.
Customer quality and project financing
Q: Brent Thielman of Oppenheimer & Co. asked how the company scrutinizes data center customers and their financing.
A: Bill George explained that they evaluate payment obligations, often relying on large national general contractors, and utilize lien rights. They demand special terms for projects where the building is highly specialized.
Q: Brent Thielman of Oppenheimer & Co. asked about power connections for pipeline projects.
A: Brian Lane stated that power connections are typically already solved for the projects they consider.
Mechanical segment margins and modular leverage
Q: Brent Thielman of Oppenheimer & Co. asked if mechanical operating margins are benefiting from modular fixed cost leverage.
A: Bill George confirmed that modular performance is a significant driver of the margin mix. Brian Lane praised the piping team's performance.
Order magnitude and execution confidence
Q: Josh Chan of UBS asked about the magnitude of orders and confidence in execution.
A: Brian Lane expressed confidence in executing the backlog due to labor availability and collaboration across operating companies.
Q: Josh Chan of UBS asked about the material mix impact on margins.
A: Bill George and Trent McKenna reiterated that the material mix is lumpy and tied to the early stages of large projects.
Political environment and data center regulations
Q: Tim Mulrooney of William Blair asked if political rhetoric or moratoriums are affecting project schedules.
A: Bill George said they have not seen any project trajectories changed by these considerations. Brian Lane noted that modular is less exposed as it can be shipped anywhere.
Q: Tim Mulrooney of William Blair asked why they haven't added more programmatic modular customers.
A: Bill George explained that they prefer to stick with their two long-term customers because the business is not easily scalable and they want to avoid mysteries.
Labor and growth strategy
Q: Julio Romero of Sidoti & Company asked what levers would expand labor capacity fastest.
A: Trent McKenna emphasized training, competitive pay, and maintaining good working conditions. Brian Lane highlighted the importance of company culture in retaining staff.
Q: Julio Romero of Sidoti & Company asked what is needed for new modular customers to become programmatic.
A: Brian Lane stated they look for commitment, payment timing, and the ability to build constructible, versatile products.
Future bookings and capital deployment
Q: Kurt Yinger of D.A. Davidson asked about capacity and whether strong bookings now might pull forward future demand.
A: Brian Lane stated there is no mathematical answer, but they remain disciplined and will continue to book work as they go further out.
Q: Kurt Yinger of D.A. Davidson asked about capital deployment strategy.
A: Brian Lane explained they look at decisions over years, not quarters, and will continue to buy back shares when prices are softer while remaining disciplined on acquisitions.
Geographic exposure
Q: Brian Brophy of Stifel asked about geographic areas of strength.
A: Brian Lane highlighted Texas, Georgia, and the Southeast. Bill George mentioned Arizona as having significant semiconductor work, though they may be selective due to existing capacity constraints.
