Primoris Services Corporation (NASDAQ:PRIM) Q3 2023 Earnings Call Transcript

Primoris Services Corporation (NASDAQ:PRIM) Q3 2023 Earnings Call Transcript November 8, 2023

Operator: Ladies and gentlemen, thank you for standing by. My name is Cheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the Primoris Services Corporation Third Quarter Earnings Conference Call and Webcast. [Operator Instructions] I would now like to turn the call over to Vice President of Investor Relations, Blake Holcomb. Please go ahead.

Blake Holcomb: Good morning and welcome to Primoris third quarter 2023 earnings conference call. Joining me today with prepared comments are Tom McCormick, President and Chief Executive Officer; and Ken Dodgen, Chief Financial Officer. Before we begin, I would like to make everyone aware of certain language contained in our Safe Harbor statement. The company cautions that certain statements made during this call are forward-looking and are subject to various risks and uncertainties. Actual results may differ materially from our projections and expectations. These risks and uncertainties are discussed in our reports filed with the SEC. Our forward-looking statements represent our outlook as of today only November 8, 2023. We disclaim any obligation to update these statements, except as maybe required by law.

In addition, during this conference call, we will make reference to certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures are available on the Investors section of our website and our third quarter 2023 earnings press release which was issued yesterday. I would like to turn the call over to Tom McCormick.

Tom McCormick: Thank you, Blake. Good morning, and thank you for joining us today to discuss our third quarter 2023 financial results and operational performance. Q3 was another strong quarter for Primoris, surpassing Q2 of this year to deliver another record for both revenue and gross profit. We also hit a new high for a total backlog for the eighth consecutive quarter up around $100 million from the second quarter to approximately $6.7 billion. We have been able to achieve these milestones by earning the trust of our clients through consistent, safe execution and approaching each customer relationship as a partnership in order to deliver positive outcomes. Of course, this can only be accomplished with our employees emphasizing our core principles each day in performing their duties.

I want to thank and congratulate them for all they do for each other, for our customers and for Primoris. In the midst of economic uncertainty and geopolitical challenges, we have shown the ability to focus on good execution and manage our business at a high level, while we are mindful of risk to our industry and the global economy. Over the past several years, we believe we have positioned Primoris to effectively manage through economic cycles due to our investments in renewables, power delivery and communications. With a more resilient portfolio and mindset centered on controlling the things that we can control, we believe that we can continue to have similar success in the future. The U.S. will continue to need to invest in many of the infrastructure solutions we provide in order to meet ambitious emissions goals and to remain competitive in the global economy with a growing demand for safe, cost-effective and reliable energy.

Now I will move on to discussing our operational performance more closely by segment. Starting with the Utility segment, we saw year-over-year improvement in revenue driven by top line growth of nearly 25% in the power delivery business. This was driven by organic growth and an additional month of contribution from PLH compared to the prior year. Gross profit declined from the previous year in part due to lower gas utility revenues and margins from reduced activity, primarily from customers on the West Coast, pushing work out to 2024. Gas Utilities has seen a decline in customer spending compared to 2022 levels but we have been encouraged by our ability to adjust our cost to minimize the margin impact of the decline in revenues. There were also some negative impacts of a slower storm season and lower margin work from legacy PLH projects and power delivery.

These projects are nearing completion, and we do not anticipate these issues weighing on margins in 2024 once they are completed and new contract rates on certain MSAs go into effect. In fact, we had three key customers signed new MSAs or agree to rate changes that will begin to have a positive impact next year. Despite some of the challenges with legacy PLH projects, our goal to win and execute on more project work and power delivery is trending in the right direction. We have more than doubled our non-MSA revenue year-to-date compared to last year, and we are nearing the successful completion of one of the largest substation projects in Primoris’ history. We look forward to securing more major projects like this in the future to help improve our margins and attract top talent.

Communications saw improved revenue and gross profit compared to the previous year that declined sequentially due to the timing of spend by customers that was more weighted to the first half of the year. We are encouraged by the growth we are seeing in the rapidly growing Texas market and continue to manage to engage with new customers to expand and diversify our client base. During the quarter, we also elected to allocate personnel and resources away from a customer requesting payment terms that were out of line with the market. This decision demonstrates our discipline in balancing our ability and desire to grow top line, but not at the expense of negatively impacting our margins or cash flow. Looking now at the Energy segment. We delivered another solid quarter, led primarily by revenue and margin growth in renewables and pipeline compared to the third quarter of last year.

Pipeline for the second consecutive quarter has outperformed our expectations with solid project execution and favorable margins. For the past two quarters, we generated the revenue and margins we expect from the pipeline business and are working to maintain these margins in the midst of a difficult market, focusing on the areas with the best opportunities and rightsizing our organization in areas that are not. Our ability to adjust to changes in the market conditions is critical to our success, and we are making progress toward delivering the results we expect. The industrial and heavy civil businesses are also having success and we continue to see many opportunities for sustained growth in the coming quarters. We already have approximately $2.6 billion in backlog in these businesses and are seeing the emergence of opportunities in this market that we haven’t seen in more than a decade.

Over the course of the next 15 months, we have more than $14 billion in identified opportunities, of which 80% are for industrial engineering and construction. I would like to point out that it’s not just the higher volume of projects, but the fact that many of these projects fit well within our core strength and expertise, giving us confidence in our ability to execute with a high degree of success. Although we do not expect to win all the projects in our sales funnel, it does reflect the high level of demand for quality contractors that is on the horizon. It also sets us up well to be selective in the opportunities we choose to pursue, and gives us and our clients the best chance to be successful over a multiyear period. Wrapping up the Energy segment, the renewables business remains a solid contributor to the segment and Primoris overall.

Revenue and gross profit reached record high for the quarter, and we were up from the previous year, in part due to increased activity and successful closeouts on several projects. Cash generation was also positive for renewables during the quarter as we have seen contract materials convert to cash on projects and are proactively managing our receivables. We maintained a backlog of approximately $1.8 billion and believe we are on track to increase backlog further as we close out the year. We have booked the majority of the work we expect to execute in 2024 and are now focused on booking backlog that will begin work in 2025 and beyond. We continue to seek out and work to retain top talent in order to build our management teams to meet the growth in demand.

We have also secured work with several new clients to broaden our customer base, avoid potential gaps in scheduling and maximize our project team utilization. Our pipeline of solar opportunities remain strong, and we are beginning to make headway in adjacent areas such as battery storage as well as high-voltage transmission and substation work, which will be executed by our power delivery business. We are in an excellent position to continue to grow our renewables business, but we also want to acknowledge some of the challenges being discussed in the industry and how we are effectively navigating and responding to them. First, there has been a great deal of industry discussion and some concern regarding how higher interest rates may affect the financing of solar projects, including remarks from some large companies involved in the solar market, higher rates and lower access to capital has the potential to negatively impact developer returns or lead to projects being delayed or canceled due to these higher costs or challenges.

We believe the larger and more robust developers will benefit as some of the smaller developers may opt to divest opportunities to those with greater access to lower cost of capital. Our view is that the best projects and developers will continue to move forward with projects and we continue to align our business with high-quality customers in order to minimize this impact. There is also the matter of supply chain constraints that could have future impacts in the market, particularly some continued module availability constraints as well as high-voltage equipment lead times for critical items, including breakers, transformers and switchgear for high voltage interconnects. There is a growing need for this equipment globally and the production capacity and materials necessary to meet demand growth are currently facing some challenges and could face even more challenges in the future.

We are persistently working to find alternative solutions and stay ahead of this by prioritizing customers with module supply and resequencing projects where an unexpected delay may occur. We are keeping an eye toward the future in regard to our planning for longer delivery lead times and being prepared in the event that high-voltage equipment begins to experience additional supply chain challenges. This will enable us to mitigate potential disruptions to our business as we did when the industry dealt with the impact of module delays throughout 2022 and into 2023. The last challenge we are working to overcome that I alluded to earlier is the development, retention and acquisition of talent. We are operating in a competitive landscape in a fast-growing industry where quality project management talent is at a premium.

Our ability to self-perform work for our customers is something we believe has worked to our advantage and made us true partners in helping them plan and execute their projects. We invest time and resources in developing our teams to execute on projects the Primoris way. Retaining those people to train the next generation of project managers is key to our success. Our disciplined approach to building our teams has been a huge asset, and we are fortunate to be in an industry that is attracting talent. However, we must be mindful to continue operating with a high level of efficiency and cost discipline in order to prevent margin erosion as upward pressure on compensation occurs in the years ahead. To summarize, these are some of the issues which existed could have an impact on the industry.

However, we are confident that our strategy to choose and work with the right customers and plan ahead for potential labor and supply chain issues will prevent us from being materially impacted by these challenges. I will now turn it over to Ken for more on our financial results.

Ken Dodgen: Good morning, everyone. Revenue for the third quarter was a little over $1.5 billion, an increase of $245 million from the prior year, driven primarily by growth in both the Utilities and the Energy segments. The Energy segment was up over $213 million or 32% from the prior year, driven by growth across all business lines: pipeline, renewables, civil and industrial. The Utility segment was up $32 million or 5% from the prior year, driven by double-digit gains in power delivery, partially offset by slightly lower volumes in our gas utility operations. Gross profit for the third quarter was approximately $174 million, an increase of $19 million or 12% from the prior year, primarily due to higher revenue and improved gross margins in the Energy segment.

Gross margins were 11.4% for the quarter, which was down slightly compared to 12.1% in the prior year. Turning to our segment results. In the Utility segment, gross profit was $64.7 million, down $13.4 million or 17% compared to the prior year. The decline was primarily due to productivity challenges on certain legacy PLH projects and lower gas utility volumes during the quarter. These factors also contributed to gross margins declining to 10% compared to 12.7% in the prior year. We believe that we are moving past the margin challenges that impacted our power delivery business. The completion of these lower-margin projects, combined with our renegotiated base rates, improved equipment utilization and a growing mix of project work has us well positioned for margin improvement in power delivery and the overall utility segment heading into 2024.

In the Energy segment, gross profit was $109 million for the quarter, an increase of $32 million or 42%, over the prior year, primarily driven by higher revenue and margins in the renewables and pipeline businesses. Gross margins came in at 12.3%, up from 11.5% in the prior year. The increase in gross margins can be attributed to another solid quarter from the pipeline business and the benefit of some project closeouts in the renewables business. The Energy segment continues to benefit from strong tailwinds in the renewables and industrial markets as well as solid execution on our backlog of projects. This, combined with improved performance in our pipeline business has led to over 45% higher revenue and over 60% higher gross profit year-to-date compared to 2022.

Taking a look at our SG&A. Expenses in the third quarter were $84.4 million, an increase of $8.7 million over the prior year. The increase in SG&A was driven by incremental costs to support growth and increased headcount. However, SG&A as a percentage of revenue decreased to 5.5% compared to 5.9% in the third quarter of last year. We expect our SG&A as a percent of revenue for the fourth quarter and full year to be in the high 5% to low 6% range. Net interest expense in the third quarter was $21.1 million compared to $13.1 million in the prior year. The increase was due to higher average debt balances and higher average interest rates. We expect our full year interest expense will be $73 million to $77 million. Our effective tax rate for the quarter was 29%, which is in line with our expectations for the full year.

However, this rate can be impacted by changes in revenue mix from higher tax jurisdictions and other discrete tax items for the remainder of the year. Net income was $48 million or $0.89 per diluted share, up $5 million from the prior year, primarily due to higher operating income, partially offset by higher interest and taxes. Adjusted EPS was $1.02 per share, down $0.10 from the prior year, primarily due to higher tax rates and interest costs associated with the PLH acquisition, partially offset by higher operating income. Adjusted EBITDA was $120 million for the quarter, an increase of $11 million or 10% compared to the prior year. Adjusted EBITDA was driven higher by increased revenues and gross profit previously mentioned. Moving on to cash flow.

We generated $74 million of cash from operations in Q3, an increase of over $84 million from the prior year. The primary drivers for the increase in operating cash flows were improved working capital, which remains a top priority and an area which we are continuing to make progress. We ended the quarter with $160.7 million of cash and net debt of approximately $945 million. Our trailing 12-month net debt-to-EBITDA ratio was around 2.6x at the end of Q3, down from approximately 3.3x EBITDA at the end of third quarter last year. We continue to be in a strong liquidity position and remain focused on further reducing our leverage toward our goal of below 2x range by the end of 2024. Total backlog at the end of the quarter was around $6.7 billion compared to approximately $5.5 billion in the prior year, an increase of 22% and another record.

Fixed backlog increased to $4.6 billion, up over $1.2 billion or around 36%, primarily due to strength in our Energy segment from renewables, industrial and heavy civil project wins. MSA backlog was mostly flat compared to Q3 of 2022 at around $2.1 billion, but up around $150 million from the beginning of the year. We expect 100% of our utilities backlog and 56% of our energy backlog to convert into revenue over the next four quarters. Wrapping up with guidance, we are reaffirming our EPS range of $2.15 to $2.35 per share and adjusted EPS of $2.60 to $2.80 per share. We are also affirming our adjusted EBITDA guidance of $360 million to $380 million for the full year 2023. However, due to the pull forward of revenue and our strong performance in the first three quarters of the year, we expect our earnings to trend toward the upper half of our guidance ranges for EPS, adjusted EPS and adjusted EBITDA.

As is typical with our fourth quarter, we expect the normal seasonal declines in our utility segment depending on timing of customer spend and weather impacts. In the Energy segment, we expect revenue to increase sequentially, but our mix of revenue to be less favorable compared to the third quarter as pipeline projects are completed and fewer renewable project closeouts are expected. Although we are still in the early planning stages, we are optimistic that we will continue to see improved revenue and earnings across most of our businesses that would provide another record year in 2024. With that, I’ll turn it back over to Tom.

Tom McCormick: Thanks, Ken. Before we take questions, I’d like to summarize some key takeaways from the quarter. First, I want to again highlight our employees’ efforts through the first three quarters of the year. We place a great emphasis on safety and productivity, and they are delivering both at a high level. Safety is an important metric, not only for the obvious reasons, but because our employees are our most valuable asset. We want to continue to drive that into the overall culture of the company. It is also a critical factor in our ability to continue working for existing customers and attracting new customers. Second, despite macroeconomic challenges, we are seeing a lot of positive momentum across many of our businesses.

In the Utility segment, we are benefiting from a growing power delivery market while working to improve margins by getting past some underperforming projects and contracts we acquired. We are also gaining share in communications and effectively managing our gas operations business despite a slight slowdown in the market in 2023. The Energy segment continues to gain momentum in renewables, and we are working to stay ahead of potential challenges that could slow or impede the progress we have worked hard to achieve over the past several years. In the industrial businesses, we are optimistic and excited about the significant growth potential that lies ahead and confident in our ability to execute on a solid backlog of projects. In all of our businesses, we are approaching each bid, each contract and each project with the goal of delivering great service for our clients while improving our profitability and cash flow.

Primoris has had a great 2023 thus far and we are in a great position to achieve the operational and financial goals we set for ourselves by finishing strong in Q4. This will require us managing our business to adjust for seasonal impacts executing on work with high quality and productivity and winning work to set us up for an even better year in 2024. I am proud of the successes we have shared as a company and believe that we are moving further down the path of consistent, successful execution. Continuing down this path we believe, will lead us to margin expansion and improve cash flow generation that will allow us the flexibility to pay down debt and make investments in the most attractive markets in which we operate, and ultimately to the benefit of our customers, employees and shareholders.

We will now open up the call for your questions.

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Q&A Session

Operator: [Operator Instructions] Your first question comes from the line of Steven Fisher with UBS. Steven, your line is open.

Steven Fisher: Thanks. Good morning. I wondering if you could just maybe give us some color on the – how big the impact of the PLH projects were in the quarter, the impact on utilities margins. Curious what the margin would have been excluding that? Because it seems like the Q4 implied is a pretty big step up to hit the midpoint of that range. I’m wondering if those MSA renewals that higher margins are already expected to ramp up in Q4 is there just something else but helping that Q4 implied?

Ken Dodgen: Yes, Steve, the impact was just a few million dollars for the quarter, but on that revenue, it took us down by 75 to 100 basis points compared to what we were expecting. But we think we’ve got most of that behind us. Q4 margins are going to be sequentially lower like they normally are due to the timing of winter kicking in and a lot of our customers shutting down for the holidays. So we’re expecting full year gross margins for utilities to be at the bottom end of our range.

Steven Fisher: Okay. That’s helpful. And I’m wondering if you could talk about what’s happening in the gas segment. You’ve mentioned some slowdown and some push outs. Can you just give a little bit of color there?

Tom McCormick: It’s really just some work out West, that was pulled forward a little bit. And we will probably see some more push also. So there is always a possibility when you do this on a – look at this work on a quarterly basis, it ebbs and flows. Clients – it’s really their money to spend, so they spend it when they want to, all we do is provide a service for them. But there was some work that was done earlier this year, they have decided to slow down. They have either reached their budgets or decided to curtail their spending towards the end of the year – the last part of the year. It’s nothing major.

Steven Fisher: Okay. And then just last. You mentioned you’re booked for 2024 renewables. How confident are you in all that work proceeding as planned, given some of the dynamics that are out there in terms of the interest rates and clarity around tax rules? I know you mentioned some of the smaller developers were going to speed to the bigger ones, right? How do you feel about your own book of business? Do you see any delays within that relative to the risks that you mentioned?

Tom McCormick: For 2024, I don’t think so. I think we’re very comfortable with where those projects are. We’ve partnered with some very good clients, very reputable. And we’ve been involved with their projects for months before we even sign the contracts. So we know where they are with respect to the financial position on the projects. We know where they are with respect to delivery of the key components for the facilities that we’re building. So I think we’re pretty comfortable with ‘24, ‘25, it remains to be seen, but we will see.

Steven Fisher: Okay, thank you very much.

Operator: Your next question comes from the line of Lee Jagoda from CJS Securities. Your line is open.

Lee Jagoda: Hi, good morning. Ken, I guess, first, can you quantify the closeouts in renewables? And as you look out to Q4, are there any additional closeouts that we could expect to hit margins positively?

Ken Dodgen: Yes, I don’t have the exact numbers, Lee, in front of me on renewables. I think it contributed roughly 50 basis points to margin for that segment this quarter. And then right now, we’re not anticipating any significant project closeouts in Q4. We have a lot of projects that are actually going to be starting up in Q4, which is why we will probably see revenue in that segment up sequentially in Q4 compared to Q3.

Lee Jagoda: And I think you mentioned some of the mix was maybe lower margin in Q4 versus Q3 in energy. Is that correct?

Ken Dodgen: Correct. Yes, because of that.

Lee Jagoda: Got it. Just one more on cash flow. How should we think about the level of free cash flow generation in Q4? And then as we look out to 2024, has anything changed relative to the contracts that you’re going to start versus the stuff that we’ve seen over the last year that should help smooth out some of this free cash flow?

Ken Dodgen: No. To answer your last question first, I think cash flow is going to continue to be relatively seasonal within the Utility segment, but within the Energy segment, it’s going to be lumpy based on the starts and completion and the completion of projects. With respect to free cash flow, I think we are going to have our seasonally strong Q4. I did not at all believe it’s going to be as high or as strong as it was last year. Last year, everything just kind of all came together in Q4, whereas this year, we’re seeing some benefit in Q3. And depending on the timing of projects completed and new projects starting up, we could see some of Q4 cash flow actually slip into Q1, which is not uncommon and similar to what we had happened 2 years ago.

Lee Jagoda: Great. Thanks very much.

Operator: Your next question comes from the line of Jerry Revich with Goldman Sachs. Jerry, your line is open.

Jerry Revich: Yes. Hi, good morning, everyone. Tom, I’m wondering if you could just update us on your ability to ramp up crews in the solar business. I think you were planning to have 15 crews at year-end. Can you talk about are you folks on track for that? And what are the plans for next year? And separately, you mentioned a number of risk factors for the industry. I just want to make sure nothing has changed in terms of the contract structures that you folks set up where any delays don’t impact your margin profile, it’s more of a function of top line impact for you folks when that happens or at least it’s been historically. And I just want to make sure that’s still the case given the cautionary remarks that you included earlier in the conversation. Thanks.

Tom McCormick: I will answer your last question first, so I don’t forget it. But we have not changed our language in our contracts. We still have the same protections. We are still doing some pre-investing also to make sure that we have the materials and the components that we are responsible for. But as far as the client obligations, they still remain in our contracts. We have not changed those. And the clients haven’t really forced us to or pushed us to either. So, we are pretty much aligned with clients that have surety of supply and I think they are fairly comfortable that we have seen it ease up delivery issues, ease up going towards the end of 2023, and they expect to see even improvement in 2024. So hopefully, that will not be an issue, and we don’t expect it to be in there, even if it is, it’s not our risk.