Legence (LGN) Q1 2026 Earnings Call Transcript

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Date

Thursday, May 14, 2026 at 10:00 a.m. ET

Call participants

• Chief Executive Officer — Jeffrey Sprau
• Chief Financial Officer — Stephen Butz
• Chief Operating Officer — Stephen Hansen
• Head of Investor Relations — Son Vann

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Takeaways

• Total revenue -- $1.038 billion, up 105% year over year, with the Bowers acquisition contributing over $240 million and organic growth at 57%.
• Adjusted EBITDA -- $118 million, an increase of 132% year over year, reflecting strong operational performance and Bowers integration.
• Adjusted EBITDA margin -- 11.4%, up approximately 133 basis points compared to the prior-year quarter.
• Segment revenue – Installation & Maintenance -- $872 million, up 142% year over year, with fabrication and data center activity the main drivers and Bowers accounting for roughly half of the growth.
• Segment revenue – Engineering & Consulting -- $166 million, a 14% increase year over year, with 75% growth in program and project management services, though engineering and design revenues fell 8% due to prior-year solar and consulting comparables.
• Adjusted gross margin – Consolidated -- 18.7%, compared to 21.9% in the prior year; the decline was due to the shift toward lower-margin Installation & Maintenance work and the impact of Bowers.
• Adjusted gross margin – Installation & Maintenance -- 15.9% versus 14.3% a year prior, driven by improved project execution and economies of scale.
• Adjusted gross margin – Engineering & Consulting -- 33.2%, down from 40.7% the previous year, primarily due to a greater mix of lower-margin program/project management work (41% of segment revenue, up from 27%).
• Backlog and awards -- $5.4 billion at quarter-end, a record up 104% year over year; excluding Bowers, backlog grew 36%.
• Book-to-bill ratio -- 1.2x for the quarter, lower sequentially due to large prior-period awards but supported by continued end-market strength.
• Free cash flow -- Exceeded $100 million, with a conversion rate above 85% of adjusted EBITDA, much higher than last year’s $25 million and 50% conversion.
• Cash and liquidity -- Cash balance was $245 million and total liquidity $414 million at period-end, after acquisitions.
• Net leverage -- Pro forma net leverage ratio at 1.8x, down from 2.9x nine months earlier, reflecting debt paydown after the IPO and cash flow growth.
• Employee growth -- Workforce exceeded 10,000 full-time employees, including approximately 7,400 skilled technicians and 1,200 engineers and consultants, up more than 1,000 technicians since year-end.
• Guidance updates -- Raised full-year 2026 revenue guidance to $4.1 billion to $4.3 billion (previously $3.7 billion to $3.9 billion) and adjusted EBITDA guidance to $470 million to $490 million (previously $400 million to $430 million).
• Fabrication capacity -- Operational footprint of 1.3 million square feet, supporting both current and pipeline demand; technical cooling systems for data centers remain the primary driver.
• Cash tax payments -- Estimated full-year 2026 range is high-$20 million to mid-$30 million, with an expected TRA payment of $8 million to $9 million for 2025 performance scheduled for late 2026 or early 2027.
• Adjusted SG&A expense -- $83 million, up from $64 million, primarily due to Bowers, higher headcount, and leases; as a percentage of revenue, improved to 8% (from 12.6%).

Summary

Legence (NASDAQ:LGN) emphasized continued expansion in mission-critical end-markets, particularly data centers, with robust order activity and multiyear backlog visibility supporting its confidence in sustained growth. Management highlighted benefits from project acceleration and margin improvement through process efficiency and strong labor recruitment, stating, “we are able to complete and ship product ahead of schedule, all while maintaining our high quality standards,” which allowed some revenue to be pulled forward. The integration of Bowers exceeded internal expectations and provided strategic geographic and customer diversification, especially among hyperscalers and colocators. The company also reported higher fabrication revenue as a share of the Installation & Maintenance segment, with management indicating expectations for this share to “probably continue to gravitate higher in the near term.” Based on strong first-quarter execution and increasing project pipeline, Legence raised both revenue and adjusted EBITDA guidance for the year.

• Sprau stated that some fabrication orders for data centers now extend “out to the end. You know, 2028,” supporting multiyear revenue visibility.
• Butz remarked that “custom fab work, we do tend to typically get higher level of prepayments than we do on other work,” which benefits working capital and free cash flow conversion.
• Management noted further growth in life sciences and healthcare backlog, with renewed RFQ activity and large projects booked after a prior period of softness.
• The company’s project pipeline was described as replenished and strong, with Sprau emphasizing, “Backlog and awards continue to grow to record levels which further derisks our 2026 guidance and provides additional visibility into a portion of 2027.”
• Legence’s net leverage improvement is viewed by management as creating flexibility for both bolt-on and medium-term larger M&A, with discipline maintained on valuation and integration criteria.
• Management expects adjusted SG&A as a percentage of revenue “to probably gravitate down” if double-digit top-line growth continues, reflecting anticipated economies of scale.
• Ongoing migration of E&C business toward engineering services for high-tech and semiconductor clients is generating new cross-selling opportunities and expanding the addressable market.

Industry glossary

• MEP: Mechanical, Electrical, and Plumbing systems—the critical building infrastructure designed and installed by engineering and construction service providers.
• OSM: Offsite Manufacturing; refers to factory-built or modular construction methods used in building mission-critical systems.
• TRA: Tax Receivable Agreement; a contractual arrangement entitling pre-IPO owners to a portion of certain tax benefits realized by the post-IPO company, creating periodic payments from the operating company.
• RFQ: Request for Quotation; an invitation from a customer to suppliers to bid on specific project scopes or services, signaling potential new business opportunities.

Full Conference Call Transcript

Son Vann: Thank you, Daniel, and good morning, everyone. Welcome to Allegion's first quarter 2026 earnings call. With me today are Jeffrey Sprau, our Chief Executive Officer; Stephen Butz, Chief Financial Officer; and Steve Hansen, Chief Operating Officer. This morning, we issued a press release that covers our first quarter 2026 financial results and posted a slide presentation that accompanies the earnings release. All materials can be found on the Investor Relations section of the company's website, wearelegence.com. Before we begin, I want to remind you that comments made during this call contain certain forward looking statements and are subject to risks and uncertainties including those identified in our Risk Factors contained in our SEC filings.

Our actual results could differ materially and we undertake no obligations to update any such forward looking statements. During this call, we will refer to certain non-GAAP financial measures which should not be considered in isolation from or as a substitute for measures prepared in accordance with generally accepted accounting principles. Please refer to our quarterly earnings presentation for reconciliations of these non GAAP measures. To the most directly comparable GAAP measures. With that, let me turn the call over to Jeffrey.

Jeffrey Sprau: Thank you, Son, and thanks, everyone, for joining today to discuss our first quarter performance and current outlook for Legence. it is only been 1.5 months since our last earnings call, and the themes that we spoke about then are still applicable today. These themes include a very healthy demand environment for mission critical building systems particularly in the data center and technology end market. Our strong project execution, our ability to attract talented labor, and the impact that M&A can bring to accelerate our growth. All of these factors contributed to our strong first quarter results that exceeded quarterly guidance. as well as provide the underpinning to raise our full-year 2026 guidance.

Our first quarter results, Steve will go into greater detail. But at a high level, total revenues more than doubled year over year to just over $1 billion. Now to put that into perspective, Legence's generated 1.2 billion of revenue for all of 2022. So we have grown revenue at an incredible pace over the past 3 years. Our historic growth was roughly split evenly between organic growth and through acquisitions. This was the case in our latest quarterly results where our acquisition of Bowers accounted for just under half of the year over year revenue gains with organic growth essentially making up the other half. Excluding the impact from Bowers, revenues increased by a robust 57% year over year.

With the majority of this growth coming from the installation and maintenance segment. While data centers and technology clients drove our growth, other key end markets such as life science, health care, education, and state and local government, also posted solid gains. Engineering and consulting segment revenue growth was a bit more broad based, across our end markets and that segment is seeing more traction with our data center and technology clients. Adjusted EBITDA grew by 132% year over year. Reflecting the contribution from Bowers as well as overall growth in our existing businesses.

EBITDA margins expanded by over 130 basis points as we benefited from strong project execution particularly with our installation and fabrication projects and better leverage of our SG&A costs. Total backlog and awards ended the quarter at a record $5.4 billion up 104% year over year. Which reflects the inclusion of ours. Excluding Bowers, backlog and awards grew by 36% from a year ago. Now on a sequential basis and pro forma for the inclusion of Bauer's backlog, we added approximately $200 million of net new backlog on top of the $1 billion in revenue recorded during the first quarter.

Most of the increase in backlog and awards came in the installation and maintenance segment, driven by the data center and technology market. While the addition of Bowers not only expanded our mechanical presence in the DC Virginia region, we also diversified our client base. In this end market increasing our presence with certain hyperscalers, and colocators. Engineering and consulting backlog rose by 13% on a year over year basis driven by state and local government, and education clients. The resulting book to bill ratio for the 3 months ended March 2026 was 1.2x.

While this is lower than the book to bill experience in the fourth quarter, realize that we had several very large awards that from a timing standpoint were booked at the end of last year. This added to backlog growth and elevated book to bill in the fourth quarter but also impacted what we would have otherwise booked in the first quarter. Now setting aside the timing aspect of when awards are booked, the underlying growth that we expect in our end markets particularly in data centers and technology, remains very robust. And we feel confident in our ability to continue to grow total backlog as the year progresses based on what we see in our pipeline.

We continue to grow our labor force to meet the strong demand that we see in the end markets that we serve. In April, we crossed over 10 thousand full-time employees at Legence. This includes approximately 7.4 thousand skilled technicians and craftspeople which is over 1 thousand more than what we began the year with. They work alongside our 1.2 thousand plus engineers and consultants to deliver projects at the highest standards for our clients across both segments. While we are always mindful of having the right people necessary to on our projects, we do not expect labor to be a material constraint on our ability to grow.

Finally, on our fabrication capacity and expansion plans, While there are some advanced tooling installations and other operational items, that we need to complete to get where we wanna be from a functionality and efficiency standpoint, we are largely up and running on 1.3 million square feet of fab capacity today. At this level of capacity and the operational flexibility that we have with this capacity, feel good about our ability to execute on our current book of business. With some room to meet the additional demand that we see in our pipeline. Our fabrication business continues to be driven by our technical cooling systems for data centers. And will likely continue to be the case for some time.

With that said, we are seeing additional indications of interest for fabrication services with our pharmaceutical and semiconductor clients. As the benefits of fabrication and modular construction are recognized by more mission critical markets, And given our relationships with many of the most technologically innovative companies in the world, we are in a great position. To capitalize on this trend. With that, let me turn the call over to Steve.

Stephen Butz: Thank you, Jeffrey, and good morning, everyone. For the remainder of our call, I will begin with a review of first quarter 26 results in comparison to 2025. Following my review of our historical results, I will make some brief remarks about our current guidance discuss our balance sheet and liquidity position before handing the call back to Jess. Starting with the 2026, we generated revenue of $1.038 billion an increase of $5.00 6 million or a 105% from the year ago quarter. The Bowers Group acquisition contributed a little over $240 million of revenue. Excluding Bowers, our revenues grew by approximately 57% year over year.

Our first quarter 26 revenues surpassed our guidance, primarily due to outperformance in the installation and maintenance segment. With very strong project execution, and fabrication as a key driver. The larger scale of data center projects in particular given us a chance to apply best practices and continuously improve our delivery model and efficiencies. As we gain inefficiency, 1 of the outcomes is that we are able to complete and ship product ahead of schedule, all while maintaining our high quality standards.

As a result, our clients are able to install and commission our system sooner allowing us to release contingencies earlier than expected, effectively pulling forward some revenue that was originally expected in later periods, and also lift our margin profile. Increased confidence around this dynamic is also behind why we are raising our full-year 2026 guidance. Which I will cover later in my remarks. Breaking down our latest quarterly revenue growth at the segment level, starting with engineering and consulting, segment revenue grew by 14% most of which was organic. To $166 million Program and project management service revenues grew at a robust 75%. Particularly strong growth in K-12 schools.

As we are working on several large projects in Pennsylvania, Virginia, and West Virginia. We also saw additional activity in data centers and technology. However, engineering and design revenues declined by 8% largely due to a very tough comparable prior year quarter that included some strong revenues from commercial solar advisory services coupled with softer demand in the current period for sustainability consulting from mixed use clients. We are hopeful that sustainability consulting will pick up in future periods. As backlog for this service has increased. Since year-end 2025. Moving to installation and maintenance. Segment revenue of $872 million increased by 142% versus the year ago quarter.

Roughly half of this growth was from the addition of Bowers, with the remaining growth largely organic. Installation and fabrication services accounted for the majority of segment growth increasing by 162%. Driven by the inclusion of Bowers and robust organic growth with data center and technology clients. The segment also experienced attractive organic growth in life science and health care, in part reflecting our work on some larger hospital projects. Maintenance and service revenue increased by 60% year over year. When excluding the impact of Bowers, this service line still grew at a robust rate in excess of 20%. This high growth rate was due in part to a somewhat softer 2025 comparison.

But also reflected healthy increases in education, hospitals, and semiconductor clients, the latter of which are included in our data center and technology end market. Classification. Turning to gross profit. Consolidated gross profit for the first quarter 2026 increased by 67%. To approximately $186 million Similar to our fourth quarter results, gross profit includes stock based and other compensation expense related to legacy profit interest units. Where the payment of this expense is born by entities outside of Legence Corp. Essentially, the legacy pre IPO shareholders. As a reminder, the settlement of legacy profit interest does not impact Legence Corp either in the form of cash outlay or the issuance of additional common shares.

Because these profit interest units are mark to market, any significant changes to our share price will have a material impact on this expense. As it did in 2026. Excluding the impact of profit interest expense, adjusted gross profit on a consolidated basis totaled approximately $194 million and adjusted gross margin was 18.7% for the first quarter 2026, compared to approximately $111 million and 21 point 9 percent in 2025.

The lower adjusted gross margin was primarily due to a revenue mix shift to the installation and maintenance segment as a result of the addition of Bowers and the high growth rate in this segment as well as lower gross margins in Engineering and Consulting segment, This was somewhat offset by the strong margin improvement in the I&M segment. Delving into margins at the segment level, first quarter 2026 engineering and consulting adjusted gross margin was 33.2%. Down from 40.7% in 2025. As mentioned, the year ago quarter was a tough comparison. In E&C as we had a few projects which generated very high margins. That were not replicated in the latest quarter.

Furthermore, the segment gross margin reflected a significant revenue mix shift toward the program and project management service line, accounted for 41% of segment revenue, compared to only 27% in the year ago quarter. Program and project management services typically generate a lower margin profile than the engineering and design, due to the bigger ticket nature of these expenses and high subcontractor pass through costs of this service line. The installation and maintenance segment generated an adjusted gross margin of 15.9%. Up from 14.3% in the year ago quarter. Adjusted gross margin improvement was driven by strong project execution within the installation and fabrication service line. We also benefited from economies of scale with our support costs within this segment.

Turning to SG&A. This expense includes approximately $32 million of stock based and non compensation expense, the vast majority of which almost $29 million was related to the legacy profit interest that is paid for by entities outside of Legence Corp. Excluding the impact of stock based and noncash compensation expense, as well as a little over $1 million of acquisition and strategic initiative expenses that are part of SG&A. The adjusted SG&A expense was $83 million up from $64 million in the year ago quarter. This increase was primarily due to the inclusion of Bowers, higher general headcount to support our growth and operate as a public company. As well as higher lease expenses.

More importantly, though, adjusted SG&A as a percentage of revenue improved significantly. To 8% down from 12.6% in the year ago quarter we benefit from greater economies of scale with these costs, relative to our strong revenue growth. All in all, we generated adjusted EBITDA of $118 million in the first quarter 2026, an increase of 132% from the first quarter 2025 level. Adjusted EBITDA margin for the first quarter 2026 improved by approximately 133 basis points to 11.4% compared to the year ago quarter. Depreciation and amortization totaled $42 million in 2026, up from $29 million in the year ago quarter. With the increase largely due to incremental amortization and depreciation that stem from the Bowers acquisition.

Interest expense net of interest income was $16 million for the first quarter 2026 and declined by $13 million from a year ago primarily due to our lower average debt balance than the year ago period. Turning to income tax. Even though we had pretax income during the first quarter 2026, we reported an income tax benefit of $13 million. This is largely due to the release of a valuation allowance on our deferred tax assets of approximately $20 million. Which flipped income tax from an expense to a benefit.

Partially offsetting the release is that a number of expense items are not tax deductible, such as the profit interest expense, and certain amortization within our corporate tax paying subsidiary group. We currently estimate our effective tax rate or ETR for the full year 2026 to be in the mid-20 to low-30% range. Though this will be substantially affected by any future profit interest expense, is difficult to forecast due to the mark to market nature of this expense. Beyond 2026, we expect our ETR to gradually gravitate toward the low-30% range. Though in any given year, our ETR could be impacted by discrete items that may not be deductible for tax purposes.

Regarding cash taxes, our current estimate for 2026 is in the high-20 to mid-$30 million range. Addition to our cash tax payments to federal and state jurisdictions, we currently expect to make a TRA payment of around $8 million to $9 million related to our 2025 operating activity sometime in late 2026 or early 2027. Our TRA payment related to estimated 2026 activity is under evaluation. But preliminary estimates put this range anywhere from the high-20 to low-$30 million range. With this payment likely to occur in early 2028. To the extent we have additional share exchanges, this should reduce our cash tax payment. While increasing TRA payments by 85% of the reduction in cash tax.

The net difference for Allegiance is a 15% reduction in the cash outflow. Speaking of cash flow, our free cash flow, defined as net income, adding back depreciation and amortization, stock based comp, and other noncash items, changes in working capital, and capital spending, exceeded $100 million in 2026, which translates to a conversion rate of over 85% of adjusted EBITDA. This is well above the roughly $25 million of free cash flow and 50% conversion rate in the year ago quarter. Reflecting our operating performance lower interest burden and improved working capital management. Switching gears now to backlog. We ended March with consolidated backlog and awards of $5.4 billion up 104% from year ago levels.

Excluding Bowers, backlog and awards grew by almost $1 billion. Or 36%. Now when compared to pro forma year-end 2025, backlog and awards grew by approximately $200 million, translating to a book to bill for the first quarter of 1.2x. As Jeff mentioned, we closed out 2025 with some very large awards, which elevated the 3 month book to bill figure in the fourth quarter. I would also note that a book to bill ratio measured over a 3 month period is quite sensitive to award timing. Especially as our business is experiencing more elevated awards in the $100 million-plus range than we have seen in the past.

In terms of our organic growth and backlog and awards, the data center and technology end market is the predominant driver. Though we are also seeing growth in state and local government and education markets. Turning to our guidance. We are establishing second quarter 2026 guidance for consolidated revenue of between $1.05 billion and $1.1 billion and adjusted EBITDA between $115 million and $125 million For full year 2026, we are increasing our revenue guidance to a range of $4.1 billion to $4.3 billion up roughly 10% from our previous guidance range of $3.7 billion to $3.9 billion that we presented during our fourth quarter report on March 27, just 7 weeks ago.

As previously discussed, this increase in part reflects our current expectations on project timing and execution, as well as our outperformance in the first quarter. We are also raising our full year 2026 EBITDA guidance range to $470 million to $490 million up from $400 million to $430 million. Our EBITDA guidance revision reflects the changes to our revenue guidance as well as a slight improvement in margin expectations. In large part based on our recent track record of outperformance and improved execution expectations. Now just a few other housekeeping items to help with your modeling efforts. Interest expense, net of interest income for the second quarter is expected to be in the $15 million range.

With full year 2026 in the high-$50 million range. Depreciation and amortization for the second quarter is expected to be slightly higher than the first quarter, with full-year 2026 D&A in the mid-$170 million range. In terms of CapEx, we still expect full year 2026 spending to be in the $65 million range, 2-thirds of which we would classify as for growth. Now moving to our balance sheet, liquidity and leverage. We ended the first quarter with $245 million of cash, up from $230 million at 2025. Total liquidity was $414 million at quarter end, nearly flat when compared to $424 million at year-end 2025, despite our use of cash for both the Bowers and Metrix acquisitions.

Total debt at the March was slightly over $1 billion, up approximately $200 million from year-end to reflect the upsizing of our term loan used to fund the Bowers acquisition. Based on pro forma last 12 months EBITDA, which would include EBITDA from Bowers between April through December 2025, prior to our ownership, our pro forma net leverage ratio is now 1.8x. Compared to 2.9x just 9 months ago, pro forma for the application of IPO proceeds which were used to repay debt. Borrowing acquisitions, we expect our net leverage ratio to continue to gravitate lower on the overall growth in the business and resulting cash generation.

Based on this current leverage profile, we believe this gives us flexibility for M&A as always will take a disciplined approach to our evaluation of any opportunities. This concludes my remarks, and now I will now turn the call back to Jeffrey.

Jeffrey Sprau: Thanks, Steve. In closing and before we get to the Q&A, our first quarter performance was a great start to the year. We continue to execute extremely well on our projects, particularly with the larger installation and fabrication projects that allow us greater opportunities to leverage our skilled workforce and technical capabilities. This was our first quarter with Bowers, and I am really pleased with the integration progress and the financial impact that Bowers has already delivered. And we aim to improve further from here. Backlog and awards continue to grow to record levels which further derisks our 2026 guidance and provides additional visibility into a portion of 2027.

Our leverage position shows how quickly we can delever and puts us in a good financial position to be flexible with future M&A opportunities. I would like to close out our prepared remarks by acknowledging the outstanding contributions of our truly amazing employees. Your dedication and commitment to serving our customers is greatly appreciated. With that, we will now open the call up to questions. Operator?

Operator: As a reminder, to ask a question, please press 1-1 on your telephone. And wait for your name to be announced. To withdraw your question, please press 1-1 again. Please stand by while we compile. Our first question comes from Adam Bubes with Goldman Sachs. Your line is open.

Analyst (Adam Bubes): Hi, good morning. Good morning, Adam. Yeah. With leverage now back below 2x, do you see scope for larger-scale M&A in the medium term similar to something that looks like a Bowers? And any updated thoughts on puts and takes on pursuing M&A in engineering and design versus installation and maintenance?

Stephen Butz: Yeah. I will take the first part of that, and Jeffrey will probably jump in on the second. But, I mean, certainly, the improved leverage profile does give us and improve our flexibility to do acquisitions sooner. That said, I would not expect another acquisition the size of ours in the very near term. As we as we discussed at the time, we announced the Bowers acquisition. You know, we are gonna be very focused on executing on a, you know, successful integration which were well along the way there. Made a lot of great progress. Bowers is exceeding expectations. So we are gonna continue to keep our eye on the ball.

With Bowers, but, you know, I think over the medium term, it certainly does give us more flexibility to do some larger-scale M&A. Yeah.

Jeffrey Sprau: that is exactly right, Steve. And certainly on the E&C front, Adam, we love bolt on or tuck in acquisitions that add customers, add capacity, add expertise in a given market and systems. And so I would expect we will continue to do that as we have historically. And Steven is exactly right. You know, optionality is a huge work for us. And having the option to be able to pursue some larger or some might even call transformative acquisitions Now that we have proven that we can delever in a rather quick fashion, really helps us as we look at the market and look at our pipeline of opportunities.

We are super picky in terms of the requirements that fit in our in our family in terms of the right marketplace and the right geographies and the right profitability and the right services and the right outlook, So there are a lot of boxes to tick, so to speak, but having the capability to be able to act quickly now is really a great position to be in.

Analyst (Adam Bubes): Great. And then second question, just wanted to ask on the data center growth. Backlog, obviously, provides really nice visibility over the next 12 months, but based on your discussions with clients and visibility into bid pipe pipeline, what is your visibility on duration and magnitude of data center driven growth beyond 12 months out.

Jeffrey Sprau: Yeah. it is a great question. We continue to have conversations daily, weekly with our data center clients. And we are getting further and further visibility into that backlog. We have got orders in some of our fabrication stuff that go out to the end. You know, 2028. And we continue to help them in plan and spend their CapEx as they move forward. So Great.

Analyst (Adam Bubes): Thanks so much.

Jeffrey Sprau: Thank you.

Operator: Thank you. Our next question comes from Julien Dumoulin-Smith with Jefferies. Your line is open.

Analyst (Julien Dumoulin-Smith): Hi, team. This is Tanner on for Julien. Good morning. Good morning. Good So the order activity continues to be robust. in I&M. You have got the visibility extending Can you maybe walk us through your view on the adequacy of your current modular capacity with Bowers Integrated and maybe what considerations, could go into either further organic or inorganic investment to increase capacity?

Stephen Hansen: Yeah. You know, our capacity ebbs and flows, you know, with the demand and schedules from our clients. We have capacity to continue to grow and take on more opportunities, you know, and we see we see a lot of strength in that market, the OSM market, and, you know, our clients moving to very rural areas and the size and complexity of these projects is really driving that business. And so we feel really strongly about it, and we have the capacity to continue to grow it. Obviously, if demand continues to get larger, we would have to look at further expansion, but that is always on our forefront of our minds. Yeah.

Jeffrey Sprau: And we continue to leverage certainly new square footage, but also automation, adding shifts, expanding, extending hours. And we are benefiting from learning curve. These are custom projects, but they are also in the data center space high volume. And so we are seeing, I guess, for lack of a better term, higher throughput on these jobs as we get better at them. And that certainly plays into the capacity evaluation.

Analyst (Julien Dumoulin-Smith): Great. Thanks for that color. And, you know, I, too, will follow up on the M&A angle, given the nice delevering position here. And as you wait platforms for inorganic growth, maybe this is an offshoot of Adam's question, but I wanted to ask this in the context of growth versus margin. With Bowers, you saw an opportunity to target growth, primarily with a longer term margin expansion opportunity. But even within I&M, how do you expect to consider margin accretion or margin improvement in organic growth and opportunities that you are seeing in the market? Thanks.

Stephen Butz: Yeah. You know, we like all 4 service lines. We participate in today, and, you know, they each have a differing margin profile. But we are certainly open to expansion within any of those. And as Jeffrey mentioned, we are picky. We look for companies that have strong margins within those service lines or if we see an opportunity to improve the their margins in those service lines, that would also be a factor that we would consider. But I would not say that we would shy away from for example, another business that has a large installation and fabrication component, which would be our lowest margin profile of all our core service lines as you can see from Bowers.

You know, that can add significant shareholder value. With the overall accretion it can bring. And we have been able to increase our margins, kind of, despite what could have been seen as a headwind there.

Analyst (Julien Dumoulin-Smith): Alright. Great. Thank you very much.

Operator: Thank you. Our next question comes from Brian Brophy with Stifel. Your line is open.

Analyst (Brian Brophy): Yes, thanks. Good morning, everybody. Nice quarter. There was a notable sequential jump in the life sciences and health care backlog, it looks like, based on some of the disclosures in the deck, and it appears only some of that was related to Bowers. So just any color any other color you can provide on what is driving that?

Jeffrey Sprau: Thanks. Yeah. We have noted in the past that coming out of COVID, there was some hangover in that life science, end market. With the overbuild through that period, and we are seeing that open back up. RFQs have been increasing. Been able to book a couple really nice large projects with our clients that we have been with for decades. So we expect that to continue. We are seeing more and more activity in that market. And some of that is also in our fabrication service line. We are doing both installation and fabrication in that market. And so really positive right now.

Analyst (Brian Brophy): Yeah. that is great. that is helpful. And then do you mind touching on the fab only growth that you saw in the quarter?

Stephen Butz: Any update on how much that accounts for as a percentage of revenue at this point? And just how you are thinking about the outlook there for the rest of the year? Thanks. Sure. it is continued to grow as expected as a percentage of the installation and maintenance segment. I think it is in the in the fourth quarter, we were in near the 20% area. And, you know, it is increased into the low twenties. We would expect that to probably continue to gravitate higher in the near term.

Analyst (Brian Brophy): Appreciate it. I will pass it on.

Operator: Thank you. Our next question comes from Derek Soderberg with Cantor Fitzgerald. Your line is open.

Analyst (Derek Soderberg): Yes. Hey, guys. Thanks for taking the questions. Wanted to start with the E&C segment margins at 33% or so this quarter. It looks like the E&C margin over the past few quarters has been kind of in the low 30s or so and maybe behind the historical kind of mid-30s margin. I was wondering if you can maybe comment on what you think margin will be for E&C this year and maybe what is the timeline to get back to more of that normal margin. Thanks.

Stephen Butz: Yes. No, great question. And as we pointed out, first quarter of last year was really an outlier when we look back over the last 4 or 5 years. And, you know, our more typical margin range has been from the low-30s to, say, 37% or so. And we are kind of falling squarely right in the middle of that now. And, you know, the gravitation's a bit lower, the last few quarters than say, from the 35, 36, 37% range is has been a higher growth rate in program and project management. And we certainly provide a lot of engineering services in that, and, you know, we lead with the engineering.

But because of the overall size of the project management activities, in there, you know, it is just a lower margin service line. But I would expect going forward it to remain more in that historic range of low- to mid-30s.

Analyst (Derek Soderberg): Got it. that is helpful. And then as my Quarter to quarter.

Stephen Butz: Got it.

Analyst (Derek Soderberg): Got it. And then as my follow-up, just a clarification and maybe for some more detail on the equipment cost. Just looking at it from a percentage of revenue, looks like it was up a bit.

Stephen Butz: At $283 million I was wondering how much of that is sort of low margin pass through on some of the equipment and if you sort of exclude that, how would the underlying gross margins trend sort of look like? I was wondering if you could maybe provide some more detail on that.

Analyst (Derek Soderberg): Thanks.

Stephen Butz: Yeah. You know, and that is why we have broken that out, because historically that and the subcontractor cost because you know, we typically would not expect to get the same margin as we do on our labor on both of those activities. And but it but it really varies. You know? Sometimes something might be a pure pass through. Other times, you know, someone might be able to get 10% or 5%. You know? So there is not 1 specific, you know, margin number we can give you. On that pass through, but it is typically much lower than our overall margin that we would expect to generate on our labor.

Analyst (Derek Soderberg): Got it. Super helpful. Thanks, guys.

Jeffrey Sprau: Sure. Thank you.

Operator: Thank you. Our next question comes from Michael Dudas with Vertical Research Partners. Your line is open.

Analyst (Michael Dudas): Good morning, gentlemen.

Jeffrey Sprau: Good morning, Michael. Jeffrey and your remarks, you talked about in the engineering and consulting business. Some gaining traction with some of your data or technology customers.

Analyst (Michael Dudas): Maybe you can elaborate a little bit about what that means and how that impacts maybe the mix of business or the tempo of bookings over the next few quarters?

Jeffrey Sprau: Yeah, no, it is really a function of leveraging our experience and relationships with a lot of these customers that we have had for decades. And our ability to take an I&M relationship in the semiconductor space, and introduce them to our E&C capabilities as they look to either expand their facilities or actually greenfield facilities. We have been able to leverage those relationships and now offer this integrated service offering to them. And so I would expect that to continue. that is part of the thesis of Legence's in general is to be more relevant and more sticky and provide more end to end to our clients. And so that was a really great example for us.

Now, historically, E&C's markets have been other markets such as health care and state and local government and k 12. And higher education schools, And so to be able to really expand their market set is really exciting for us. And, you know, it is in these high-tech customers, you know, their credibility is a big deal. For you to gain new business and to be able to leverage credibility that is been well earned, hard earned, for decades and introduce a complimentary services is really been great to see, and it is a big focus internally as we look at opportunities and share cross-selling tactics and training and that sort of thing.

So I do not have a number I could quote you. In terms of predictions, but it is absolutely the trend that we are supportive of. And we will be pushing hard going forward.

Analyst (Michael Dudas): That sounds good. And to follow-up, you mentioned or Steve mentioned on your bookings. You had accelerated bookings in Q4 that took a little bit from, say, Q1. Maybe if you look at the pipeline and your conversion cadence and how that may flow through the next few quarters. Are--given what we are seeing in the marketplace, customers want things done yesterday as opposed to tomorrow.

Stephen Butz: Well, that is true. You know, the timing of the bookings, though, again, a quarter is a short period. So we certainly look at it over a little bit longer period. You know, if you average the first quarter and the fourth quarter, very robust at 1.5 times. You know, we do not typically forecast a book to bill, but not really seeing a slowing in the data market. No.

Jeffrey Sprau: I agree, Steve. And from a pipeline standpoint, as if we put some real chunky bookings into our backlog, and then we do not report on pipeline. We have been able to replenish it and keep it strong. So we feel positive that trend will continue.

Stephen Butz: Yeah.

Jeffrey Sprau: And just to pile on there, certainly, in the case of data centers, and modular construction, by the time we get called in, that project is well underway. And so you are right, Michael, in terms of when they say, hey, we need your help here. it is go time. Right? it is a quick turnaround, and that is actually to our benefit. Our ability to be quick to scale quick design, and quick to manufacture as a differentiator. And that is the reality. If you wanna participate in that business, you have to have that skill set.

Analyst (Michael Dudas): Excellent. Excellent. Thank you, Jeff. Thank you.

Operator: Thank you. Our next question comes from Miguel Marques with Bernstein. Your line is open.

Analyst (Miguel Marques): Morning, guys, and thanks for taking the question. Just a 2-parter for me. On the modular business first, what sort of margin profile does that business have, even in context to the rest of I&M, if you could, just to get a sense of, the mix impact there? That could either be accretive or not to margin going forward?

Jeffrey Sprau: Yeah. We do not disclose the margin separately on that. I would say though that it is accretive. You know, our margin profile is higher when we are doing custom fab work than a large in installed job. So it is, you know, a benefit to us that percentage of fab is increasing.

Analyst (Miguel Marques): Understood. And more just a high level question on free cash flow. So I guess, first, how are you guys thinking about free cash flow for this year? And second, you know, obviously, there is been a trend of your business just being less working capital intense over the last several quarters. So in that vein, you know, if this were to be structural, I guess, what do you think it could mean in terms of your longer term free cash flow profile? And if there is a way to think about that or not, be it free cash flow margin or conversion.

I know you guys talked about more than 85% adjusted EBITDA conversion this quarter, but is that something that we could anchor to going forward? Or what should that look like?

Stephen Butz: Yeah. Good question. You know, it is not something we specifically guide to, but the thinking about some of the puts and takes, we do certainly have good momentum in the business, and even at the time of IPO, we talked about the fact that we saw our conversion rate increase from historic levels going forward, and it has. And, certainly, the debt pay down helps. Better working capital management was something that we talked about that we focused on. We are seeing the benefits of that. All that said, the first quarter you know, we grew revenues tremendously and still had a benefit from working capital. I do not know that I would guide to that every quarter.

Though with our custom fab work, we do tend to typically get higher level of prepayments than we do on other work. And so that is a trend that we would still expect to continue. But, again, I think when you are growing revenue at such a high rate, probably typically, you know, quarter in, quarter out, maybe expect working capital to be a bit of a use of cash.

Operator: Thank you. As a reminder, to ask a question, please press 1-1 on your telephone. Again, that is 1-1 to ask a question. Our next question comes from Oliver Davies with Rothschild and Co. Redburn. Your line is open.

Analyst (Oliver Davies): Guys. Good morning. Just 2 for me. I am just wondering if you can provide, any color on end market growth organically, particularly data centers and anything else that you would call out? And then secondly, you know, how should we think about adjusted SG&A as a percent of sales going forward, particularly in the context of the relative growth rates of E&C and I&M? Thanks.

Stephen Butz: Yeah. You want to start with--I will start with the second question. And then hand it to Steve. But you know, on adjusted SG&A as a percent of revenue, I think we would expect it to probably gravitate down if we are continuing to grow revenue at double digit pace. You know, that is obviously a key factor. We are gonna need to grow our G&A, but we would expect when we are growing at a double digit pace on the on the top line that it would it would not grow at quite the same pace until we should continue to see some economies of scale over time.

Stephen Hansen: And end market growth in the data center technology, right? We are seeing that we are about 30% organic growth in there. And I would point out that we are continuing to grow all of our other end markets as well as percentage of revenue, you know, they take a hit because data center technology is large. But on a true dollar basis, we are seeing growth in all of our end markets, you know, maybe except for what we would call commercial real estate that is a soft market right now and not a key market that we are pursuing day in and day out.

Analyst (Oliver Davies): Okay. Thanks.

Operator: Thank you. And our next question comes from Chris Sung with Wolfe Research. Your line is open.

Analyst (Chris Sung): Hey, good morning, gentlemen. Congrats on the nice quarter. Just going back to M and A, given all the hype and interest around MEPs for data centers, are you seeing valuations for M&A targets rise? Like, is price becoming a larger factor?

Jeffrey Sprau: Yeah. that is a good question. You know, maybe a little bit. You know, we do not have, obviously, visibility in every single deal and every single process. I think people realize that the systems that are going into these data centers are really, really critical, and the good providers are delivering a ton of value. And so, you know, as a really vague but general statement, I think they are probably going up a little bit. I do not however, think they are going up so much they would not be attractive to pursue.

Of course, like any, whether it is MEP or E&C or any consultancy, we are always gonna look at sort of the value that they would bring from a pricing perspective. But we do not see anything that is prohibitive for us from a pursuit perspective.

Analyst (Chris Sung): Okay. Thanks. And just on my follow-up, on your revised guide, I mean, can we use Q1 as a run rate to, like, thinking of E&C revenue annualizing to, let's say, $660 million and then I&M to, like, $3.5 billion to get to that, you know, $4.3 billion revenue range. Is that a fair split for, like, your 2 segments?

Stephen Butz: I think for E&C, we do still have a bit of seasonality. So I probably would not take the first quarter as a kind of a an annualized type figure to date. I&M is probably, you know, quite a bit less cyclical or seasonal, I should say, So, you know, that is probably gonna be driven more so by our by our backlog and awards scheduling.

Analyst (Chris Sung): Alright. Thank you, guys. Alright. Thank you, guys. This concludes the question and answer session.

Operator: I would now like to turn it back to Son Vann for closing remarks.

Son Vann: Thank you, everyone, for attending our first quarter 26 earnings call. A recording of this call will be available on our website in a few hours. I look forward to updating you again on our next earnings call. And with that, this concludes our call.

Jeffrey Sprau: Thank you very much.

Operator: This concludes today's conference call. Thanks for participating. You may now disconnect.

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