MYR Group Inc. (NASDAQ:MYRG) Q4 2022 Earnings Call Transcript

MYR Group Inc. (NASDAQ:MYRG) Q4 2022 Earnings Call Transcript February 25, 2023

Operator: Good morning, everyone, and welcome to the MYR Group Fourth Quarter and Full Year 2022 Earnings Results Conference Call. Today’s conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to David Gutierrez of Dresner Corporate Services. Please go ahead, David.

David Gutierrez: Thank you, and good morning, everyone. I’d like to welcome you to the MYR Group conference call to discuss the company’s fourth quarter and full year results for 2022, which were reported yesterday. Joining us on today’s call are Rick Swartz, President and Chief Executive Officer; Betty Johnson, Senior Vice President and Chief Financial Officer; Tod Cooper, Senior Vice President and Chief Operating Officer of MYR Group’s Transmission and Distribution segment; and Jeff Waneka, Senior Vice President and Chief Operating Officer of MYR Group’s Commercial and Industrial segment. If you did not receive yesterday’s press release, please contact Dresner Corporate Services at 312-726-3600, and we will send you a copy.

Or go to the MYR Group website, where a copy is available under the Investor Relations tab. Also, a webcast replay of today’s call will be available for 7 days on the Investors page of the MYR Group website at myrgroup.com. Before we begin, I want to remind you that this discussion may contain forward-looking statements. Any such statements are based upon information available to MYR Group’s management as of this date, and MYR Group assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. These risks and uncertainties are discussed in the company’s annual report on Form 10-K for the year ended December 31, 2022, and in yesterday’s press release.

Certain non-GAAP financial information will be discussed on the call today. A reconciliation of these non-GAAP measures to the most comparable GAAP measures is set forth in yesterday’s press release. With that said, let me turn the call over to Rick Swartz.

Richard Swartz: Thanks, David. Good morning, everyone. Welcome to our fourth quarter and full year 2022 conference call to discuss financial and operational results. I will begin by providing a summary of our fourth quarter and full year results, and then we’ll turn the call over to Betty Johnson, our Chief Financial Officer, for a more detailed financial review. Following Betty’s overview, Tod Cooper and Jeff Waneka, Chief Operating Officers for our T&D and C&I segments, will provide a summary of our segment performance and discuss some of them were our Group’s opportunities going forward. I will then conclude the call with some closing remarks and open the call up for your questions. We finished 2022 with strong financial performance in the fourth quarter and full year revenues of $3 billion, setting a record high for the eighth consecutive year.

Our backlog of $2.5 billion at the end of 2022 also representative record high and reflects continued investment in infrastructure and the growing demand for clean energy transformation projects. Serving as a strong and nimble partner for our clients, we continue to expand our customer relationships through alliance agreements and master service agreements across our districts, while seeing healthy bidding activity to capture new work. The 2023 construction outlook released in January by the Dodge Construction Network projects an 8% expansion in power and utility spending, up to $56.4 billion this year as demand on our nation’s electrical infrastructure increases and the need for viable clean energy sources grows. We continue to track these opportunities and seek to intelligently bid and execute projects to position us for future success.

Similarly, our C&I segment continues to execute a solid pipeline of work supported by strong relationships with our preferred clients and a demand for clean energy sources and integration. Working closely with our clients on preconstruction planning and project approach help us to mitigate and navigate potential hurdles. Our core markets, including data centers, healthcare and transportation, continue to provide steady opportunities. Expansion of our client relationships, a commitment to the safety, training and development of our dedicated employees and superior execution of projects created the foundation for our accomplishments this year, an increasing need for grid modernization, system hardening and reliability as well as decarbonization goals and legislative funding are the primary drivers we believe will continue to create numerous opportunities.

MYR Group plays a key role in building the critical infrastructure needed to support the clean energy transformation and improving the electrical system, positioning us well for 2023 and beyond. Now Betty will provide details on our fourth quarter and full year 2022 financial results.

Betty Johnson: Thank you, Rick, and good morning, everyone. On today’s call, I will be reviewing our quarter-over-quarter results for the fourth quarter of 2022 as compared to the fourth quarter of 2021. Fourth quarter 2022 revenues were $864 million, another record high, which represents an increase of $218 million or 33.7% compared to the same period last year. Our fourth quarter T&D revenues were $513.7 million, a record high for our T&D segment with an increase of 45.4% compared to the same period last year. The breakdown of T&D revenues was $347.7 million for transmission and $166 million for distribution. The T&D segment revenues increased primarily due to an increase in revenue on both transmission and distribution projects, including incremental distribution revenues from the acquired Powerline Plus Companies.

Approximately 50% of our fourth quarter T&D revenues related to work performed under master service agreements. C&I revenues were $350.3 million, a record high for the C&I segment with an increase of 19.6% compared to the same period last year. The C&I segment revenues increased primarily due to an increase in revenue on various sized projects in certain geographical areas. Our gross margin was 11.1% for the fourth quarter 2022 compared to 12.9% for the same period last year. The decrease in gross margin was primarily due to overall cost increases mainly associated with supply chain disruptions and inflation. Gross margin was also negatively impacted by labor inefficiencies and climate weather experienced on certain projects and an unfavorable change order on a project.

These margin decreases were partially offset by a favorable change order adjustment, better-than-anticipated productivity on certain projects and a favorable job closeout. SG&A expenses were $58 million, an increase of $5.4 million compared to the same period last year. The increase was primarily due to the acquisition of Powerline Plus Companies and an increase in employee-related expenses to support the continued growth in our operations. Fourth quarter 2022 interest expense was $1.3 million, an increase of $1 million compared to the same period last year. The increase was primarily due to higher outstanding debt associated with the acquisition of the Powerline Plus Companies and increased interest rates during the fourth quarter of 2022 as compared to the same period last year.

Fourth quarter 2022 net income was $24.6 million or $1.46 per diluted share, both were record highs for MYR compared to $20.7 million or $1.20 per diluted share for the same period last year. Fourth quarter 2022 EBITDA, also a record high, was $52 million compared to $41.4 million for the same period last year. Total backlog as of December 31, 2022, was $2.5 billion, a record high and 39.8% higher than a year ago. Total backlog as of December 31, 2022 consisted of $1.1 billion for the T&D segment and $1.4 billion for our C&I segment. Moving to liquidity and our balance sheet. We had approximately $223.3 million of working capital, $40.6 million of funded debt and $349.3 million in borrowing availability under our credit facility as of December 31, 2022.

We have continued to maintain strong funded debt-to-EBITDA leverage ratios that is 0.23x leverage as of December 31, 2022, partly as a result of our record high quarterly free cash flow of $65.2 million achieved during the fourth quarter of 2022. We believe that our credit facility, strong balance sheet and future cash flow from operations will enable us to meet our working capital needs, equipment investments, growth initiatives and share repurchases. In summary, we had improvements this quarter in revenue, gross profit, net income, earnings per share, EBITDA, free cash flow and backlog, all compared to the prior year. This strong quarter also enabled us to reach record annual revenues of $3 billion, with record highs in both our T&D and C&I segments.

For the year ended December 31, 2022, we also reached a record high EBITDA of $175.8 million and strong free cash flow of $90.4 million. I’ll now turn the call over to Tod Cooper, who will provide an overview of our Transmission and Distribution segment.

Tod Cooper: Thanks, Betty, and good morning, everyone. Our T&D segment experienced solid growth in execution in the fourth quarter and throughout 2022. Steady bidding activity led to strategic wins and the expansion of new and existing client relationships. These trends are forecasted to continue, and we believe the outlook for 2023 and beyond is positive. Robust investments in system hardening, grid modernization, transmission expansion and the integration of clean energy sources were drivers for the T&D segment in the fourth quarter and throughout the year. These investments are projected to grow moving forward. As Rick mentioned, the Dodge Construction Network outlook for the 2023 construction industry released in January, projects healthy growth in power and utility spend this year.

The 2022 North American electric distribution forecast by the C3 Group released in October forecast $248 billion in distribution infrastructure spending by utilities over the next 5 years. This investment across the country continues to be driven by system hardening and fire mitigation efforts in key states where MYR Group has a solid market presence as well as a growing customer base. The stronger focus on system hardening and grid resiliency along with the demand for more clean energy has the potential to generate additional opportunities for our business moving forward. Our T&D segment expanded upon existing client relationships through long-term extensions of alliance agreements throughout the U.S. in 2022. This includes master service agreements for electric vehicle infrastructure as well as transmission and distribution construction projects.

Our long-standing relationships with our largest customers remain strong and could create future opportunities in addition to the work we currently provide. A solid backlog, combined with opportunities across all districts in transmission and distribution and large capital projects could provide strong opportunities for additional work in the near and long term. This is evident by the recent award of a large-scale solar project in Southeast Texas with a total project value in excess of $200 million. This project was not included in our year-end backlog. In summary, our deepening and expanding customer relationships, thanks to strong project execution and client collaboration, combined with new contract wins and a burgeoning clean energy transformation market, positioned MYR Group well in the fourth quarter and throughout 2022.

We will continue to actively bid and execute projects of varied capacity, size and complexity across the U.S. and Canada, while maintaining our consistent focus on safety and the development of our dedicated workforce to ultimately enable us to take home the important work ahead of us. I will now turn the call over to Jeff Waneka, who will provide an overview of our Commercial and Industrial segment.

Jeffrey Waneka: Thanks, Tod, and good morning, everyone. Our C&I segment saw a steady fourth quarter and full year results, thanks to our diligence throughout 2022. We experienced positive quarterly bookings this past year and a 29% year-over-year increase in backlog. In addition to our positive book-to-bill, we have numerous projects in the pipeline that are expected to allow continued growth. Continued inflationary and supply chain disruptions impacted our district offices, vendors, peers and clients in the fourth quarter. While we are pleased to see inflation cooling, interest rates moderating and supply chain disruptions stabilizing, we are not yet seeing improved confidence in bringing projects to contract any faster. In response to continuing market disruption, clients are placing even greater priority on hiring contractors with proven preconstruction services, exceptional execution and national buying power to help them navigate this uncertainty, all areas of strength for MYR Group.

Collaboratively working with our clients and focusing on operational strength and execution enables us to mitigate many of these market constraints. One of our surging growth areas continues to be clean energy market. We are pleased that our portfolio of solar battery storage and projects continues to flourish in meaningful ways. Nearly every division of C&I has increased its backlog or is pursuing opportunities in the clean energy space. The projects range in size from small to large projects and are located from coast to coast. Fourth quarter awards were lumpy, but pursuits on new opportunities continued providing optimism on projects that are slated to start construction in 2023. In addition to our clean energy awards, healthcare has remained strong and continues to offer attractive projects in several regions, most notably in our Canadian operations where subsidiary company Western Pacific Enterprises continues to successfully execute projects in Western Canada and is awaiting contracts on new hospitals that will begin construction in 2023.

Our healthcare resume in this region is vast, leading Canada’s largest general contractors to lean on our services. Healthcare projects remain equally active in the United States as well, with notable hospital expansions in Southern California and Colorado. California subsidiary, CSI, continues to execute many healthcare facilities and future opportunities are ample. Colorado subsidiary Sturgeon Electric sees a continued expansion of their healthcare group with recent awards across the state. All subsidiary companies are leveraging their deep and successful experience in healthcare to place them in leading positions on many exciting projects. Outside of healthcare, Western Canada continues offering desirable opportunities in light rail transit.

Western Pacific Enterprises is well known for its highly skilled personnel who have built substantial portions of Vancouver and Edmonton Skytrain. Vancouver has ambitious plans to continue expanding the Skytrain and WPE is engaged in several pursuits that could expand our footprint in transit. Other exciting opportunities in Canada include water treatment facilities and electrical upgrades for petroleum facilities and LNG projects. Moving to another consistently strong end market, data center activity was robust in many of our locations as clients seek to expand facilities utilizing contractors who possess deep resources and proven performance. With substantial operations in key areas, our mission-critical teams remain in high demand in both existing facilities and on new builds.

Although high-tech companies have recently announced their plans to make mass layoffs, we’ve not seen reductions in capital expenditures to build, expand and maintain their data center facilities. We remain optimistic about the long-range outlook and our ability for future growth as funding from the Infrastructure Investment and Jobs Act becomes reality. Clients across the country are excited about the potential to modernize roads, bridges, transit rail, ports, airports and water infrastructure and are starting to step up their partnering efforts in preparation for this work. To conclude, we are proud of how our employees are responding to the unique challenges facing the industry. They continue providing the proactive and customer-focused communication that we believe will enable the MYR Group to maintain a leading position in the markets we serve.

Thanks, everyone, for your time today. I’ll now turn the call back over to Rick, who will provide us with some closing comments.

Richard Swartz: Thank you for those updates, Betty, Tod and Jeff. We are proud of our fourth quarter and full year 2022 performance, which demonstrated the strength of our sound business strategies and operations across both market segments. We are excited about the role in the clean energy transformation, performing the critical work necessary to make clean energy viable sources of power. Equally important, we serve our clients in the delivery of safe, reliable and cost-effective power to their customers and facilities. Our commitment to delivering exceptional value to our clients, communities and shareholders while supporting the success and safety of our talented employees and strategically growing our business through sound investment set the foundation for our success.

Thank you to all of our dedicated employees for your hard work this past year, to our clients for their continued trust and to our shareholders for your ongoing support. I would also like to thank Betty for her contribution to the company and her tenure as CFO as she transitions towards retirement, and welcome Kelly Huntington to MYR Group as Senior Vice President and CFO. I look forward to working with you all in 2023 and beyond. Operator, we are now ready to open the call up for your comments and questions.

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Q&A Session

Operator: . Our first question will come from line of Justin Hauke from R.W. Baird.

Justin Hauke: So I guess my question is, obviously, you guys don’t give guidance and we understand that. But your peers now with the revenue growth growing solidly in double digits and you accelerated here in ’22. Your backlog is up 40% year-over-year, it’s up 60% in T&D. And so I guess maybe just from a kind of a framework way of thinking about where revenue grows next year. Do you have the capacity to continue to grow at a double-digit rate given that your backlog would support that?

Richard Swartz: I think with everything going on in the marketplace, we’ve talked about the supply chain disruptions, other issues out there that can kind of continue to push forward. And we’re not completely out of that at this point. We’ve seen some improvements this last quarter, we did see some improvement on kind of the supply chain disruptions with some material coming in a little sooner than we planned. But I wouldn’t anticipate double-digit growth barring an acquisition coming into play or something like that. But we do see continued growth, and we’ll continue to push where we can.

Justin Hauke: Okay. Fair enough. And maybe my other question would just be you’ve had some big projects that were ramping that helped with some of that revenue growth, you’ve had solar project, you’ve had some larger T&D ones. are some of the larger projects that you booked over the last couple of quarters, are they still ramping? Or are you kind of at a state right now with some of that larger stuff that tends to kind of move things up and down on a quarter-to-quarter basis?

Richard Swartz: Those larger projects are going to continue to ramp up. The newer ones that we’ve landed, those haven’t ramped up yet. Some of the older ones are kind of coming off are burning out. We had Marcy to New Scotland. That project will finish up the end of this year, the beginning of next year. We had C70 project on the C&I side finish up this year, and there’s a little bit that continues through ’23. But with that, we’ve got great opportunities out there, and we’ve got a good backlog of new projects starting.

Justin Hauke: Okay. I guess I’ll leave it there and maybe jump in after someone else asks questions.

Operator: Our next question comes from the line of Nick Breckenridge from KeyBanc.

Alexander Dwyer: This is Alex Dwyer for KeyBanc. So T&D was a major revenue driver this quarter. I think you guys had cautioned around potential headwinds from budget constraints with certain customers last quarter. I’m just kind of wondering how that played out in 4Q and if you were able to move some crews around to other areas or if there’s something else that really drove that surprise in the quarter?

Richard Swartz: We did see those disruptions in a couple of areas, but we’re able to move those crews around. So that was a positive thing. We also had some good movement on our clean energy side with material coming in, which allowed us to move some subcontractors up forward a little ways of what we had planned originally. So that was kind of that revenue beat and where that kind of accounted for it.