Everus Construction Group, Inc.

2024 Result Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question, press star one again. Thank you. I would now like to turn the call over to Paul Martin, please go ahead.

Thank you. Welcome to Everest Construction Group's third quarter 2024 results conference call. Leaving the call today are CEO Jeff Seed and CFO Max Marcy. We issued a news release yesterday detailing our third quarter 2024 operational and financial results. This release, together with the accompanying presentation materials, are publicly available on our website at investors.everest.com. I would like to remind you that management's commentary and responses to questions on today's conference call may include forward-looking statements, which by their nature are uncertain and outside of the company's control. Although these forward-looking statements are based on management's current expectations and beliefs, actual results could differ materially. For a discussion of some of the factors that could cause actual results to differ, please refer to the risk factors section of our latest filings with the SEC. Additionally, please note that you can find reconciliations of historical non-GAAP financial measures in the news release issued yesterday and in the appendix of today's presentation. Today's call will begin with prepared remarks from Jeff, who will provide a review of our recent business performance including an overview of our forever value creation strategy, followed by a financial update from Max. At the conclusion of these prepared remarks, we will open the line for your questions. With that, I'll turn the call over to Jeff.

Thank you, Paul, and good morning to everyone joining us on the call today. We are very excited to be here with you all today as we report our first quarterly results as a standalone public company following our spinoff from MDU Resources, which we completed just last week. Over the 27 years, we have built a scaled national platform of market-leading local brands, positioning us as a leading specialty construction solutions provider. We have developed the scale needed to enter the market as an independent public company and are now ideally situated to execute on our forever strategy and drive value creation for our new shareholders. We are a people-first business with more than 8,500 highly skilled team members currently working across the United States. And we certainly would not be here today without the hard work and dedication of our entire team. From our operating brand leadership through our field employees, we have industry-leading skilled talent. I am eternally grateful for everything they do and feel honored and privileged to lead this tremendous team. Now turning to our third quarter performance, which we highlight on slide four. We generated strong third quarter results with continued execution across our portfolio of projects, financial discipline leading to solid free cash flow conversion and record backlog positioning us for continued success. Our third quarter revenue increased 6%, driven by balanced growth across our diversified end markets, particularly continued momentum in our data center work. Our electrical and mechanical revenues increased 4%, while our transmission and distribution revenues grew 12%. Our third quarter EBITDA increased 12%, driven by our balanced revenue growth, strict financial discipline, and project efficiencies, demonstrating our strong execution. As a result, our third quarter EBITDA margin improved 40 basis points to 8.5% versus 8.1% in the third quarter last year. Our total backlog at the end of the third quarter was nearly 2.9 billion, an all-time record with an increase of 56% from the end of the third quarter last year. Our backlog growth emphasizes the strength of our national platform of market-leading local brands, our deep customer relationships, and our strong strategic positioning in markets that are benefiting from favorable secular tailwinds. Our record backlog provides good visibility into our near-term growth outlook and strong operating momentum. We are pleased with our solid third quarter performance and based on our strong backlog growth and continued momentum in our key end markets, we are reaffirming our 2024 financial outlook and are very excited about the opportunities ahead. Let me shift gears a bit and provide an overview of our Forever Strategy, which forms the foundation for our value creation framework and is detailed on slide five of today's presentation. Our Forever Strategy is the basis for everything we do and is designed to deliver value creation through sustained profitable growth, operational excellence, and disciplined capital allocation. Our Forever Strategy starts with E for our employees. We are a people-first business and our highly skilled, industry-leading workforce is critical to ensuring successful outcomes for our customers. Our culture starts with safety. We are an industry and safety standards and our extensive training program ensures that we constantly maintain, grow and share our skills across our national platform. Our strong union relationships, which covers 82% of our workforce ensures that we have access to a highly skilled and scalable workforce as we grow. The V in our forever strategy is for value. value for our customers, and ultimately value for our shareholders. Driving value for our customers ensures long-term relationships that drive repeat business and a platform for growth. The second E in FOREVER is execution. Our proven, repeatable project playbook is at the heart of our execution strategy. Our disciplined focus on our playbook enables our consistent, high-quality execution across the project lifecycle. This helps us reduce risk, generate a resilient margin profile, and provide high-quality outcomes for clients. Our playbook runs from pre-construction through construction and into the post-construction phase. It covers everything from thoughtful project selection to bidding discipline and systematic project execution with a relentless focus on safety to post-construction services. We also review lessons learned and prioritize customer satisfaction and customer retention. Finally, the R in FOREVER is for relationships. Our high-quality execution on complex projects for marquee customers ensures strong customer relationships and repeat business. We are very committed to building and maintaining these long-term relationships, which is clearly demonstrated by the tenure of our top customers who have been trusted partners for an average of more than 30 years with some of the customer relationships predating Everest's acquisition of the local operating brand. These long-term relationships prove that our highly capable team provides long-term added value through safe, high-quality project execution. We are committed to driving sustained value creation through a dedicated focus on our Forever Strategy while targeting growing submarkets, focusing on operational excellence, and prioritizing disciplined capital allocation. Our plan is highlighted on slide 6 in today's presentation. Our Forever Strategy is designed to help us deliver sustained growth And we have multiple levers for growth. First, our strong customer relationships provide opportunities for us to grow in existing end markets. We have a strong track record of growing with our customers, and we are well positioned to continue doing so in the future while gaining additional market share. Second, we are well positioned with proven capabilities and experience to capitalize on multiple megatrends in the submarkets that we serve. Some of our key near-term opportunities include the strong growth in data center construction and the focus on grid modernization, high-tech reshoring, and the energy transition. Third, our existing long-term relationships with customers give us opportunities to grow into new geographies with our customers through satellite projects. When we've successfully completed a complex project in one location, A customer may ask us to perform the same or similar work in another location. Our national platform with market leading local operating companies enables us to readily transfer our capabilities to another area and utilize our proven repeatable playbook to successfully execute the project and expand our geographic footprint. And finally, the last lever of our growth strategy is the ability to supplement our organic initiatives through strategic M&A. We operate in fragmented industries, and we have a proven track record of successfully identifying and integrating acquisitions that have generated compelling financial results. We benefit from a capital life business model that produces strong, free cash flow. Now, as a standalone company with total control over our capital decisions, We have the financial flexibility to execute on our M&A strategy. Also, a focus of our value creation framework is operational excellence, with a priority on consistent and resilient margins. Our operating excellence is driven by our bidding discipline, a focus on higher margin submarkets within respective end markets, and our operating leverage. Based on the discipline focus on these initiatives, Coupled with the execution of our growth strategy, we expect a resilient margin profile with an opportunity for modest margin expansion over time. And finally, the last part of our value creation framework is built on our disciplined capital allocation strategy. Our first priority will be to continue to invest in our business. Going forward, we will increase our capital expenditures slightly between 2% and 2.5% of revenues up from our historical average of roughly 1.5% with the incremental amount focused on organic growth opportunities. Second, we will look for value-enhancing opportunities through M&A that either expand our geographic reach or strengthen our market position, particularly in high-growth submarkets. It is important to note that we will only complete a transaction at the right time, with the right metrics, at the right value. We will look for deals that are financially accretive and maintain optimal leverage. Third, if we don't see the right organic or inorganic investments, we will pay down debt and de-lever our balance sheet to provide ample dry powder for when the timing of investment is right. Lastly, we do not have a dividend policy or share repurchase authorization in place. However, we will work with our board to decide when those returns are prudent in the future. Right now, as a new standalone company with meaningful growth opportunities, we feel it's best to invest in ourselves to drive maximum shareholder value. Max will provide more details during his comments. But as we highlight on a long-term value basis on slide 7 of today's presentation, we expect our forever strategy to drive us toward a financial framework of organic revenue growth in a range of 5 to 7% annually, which combined with our discipline focused on operational excellence will enable annual EBITDA growth of 7 to 9%. Our framework is based on capital spending of 2 to 2.5% of revenue which is slightly higher than historical levels as we will invest more in our growth opportunities. We will deliver these financial results while maintaining a targeted net leverage of 1.5 to two times. Importantly, this is our expectation for organic growth. And as I've discussed, we expect that M&A will play an important role in our growth framework and will supplement our organic growth strategy. Bottom line, We could not be more excited by our strategic position and the opportunities that lie ahead for Everest. We are strongly positioned to benefit from multiple megatrends in the submarkets and end markets we serve. We have a seasoned leadership team that has been instrumental in developing and executing on our Forever strategy. We have a scaled national platform with market-leading local brands and long-tenured customer relationships. Our people-first culture helps us attract and retain top industry talent and maintain industry-leading safety results. And our diversified revenue base, capital-light investment model, and disciplined capital allocation approach position us for sustained growth and business resilience. With that, I'll turn it over to Max.

Thank you, Jeff, and good morning, everyone. I will provide additional details on the quarter give an update on our liquidity and balance sheet, and wrap up with our guidance. Beginning on slide nine in today's presentation, net revenue for the third quarter of 2024 was $761 million, an increase of 6.1% compared to the same period last year. The increase in revenue during the quarter was driven by E&M revenues increasing 4% and T&D revenues increasing 12%. The growth was highlighted by our E&M commercial end market, led by the data center submarkets, and momentum in our T&D utility end market, led by the transmission and underground submarkets. Total EBITDA was $65 million during the third quarter, an increase of nearly 12% from the same period last year. The growth in EBITDA was driven by solid revenue growth income from joint ventures, and strong project execution, partially offset by higher selling general and administrative expenses. E&M benefited from positive project efficiencies, highlighting our ability to safely complete projects on time and within budget. This resulted in third quarter EBITDA margin of 8.5%, an improvement of 40 basis points from last year. At September 30th, Total backlog was an all-time record $2.9 billion, up 56% from backlog of $1.9 billion at the end of the third quarter last year. Our backlog growth reflects strong momentum in our E&M business combined with the impact of project timing, as we have seen some E&M projects get pushed out a bit. As a reminder, our backlog burn rate can move around quarter to quarter based on the type and size of projects. Additionally, a portion of our revenues, including our MSA work, do not go through backlog. Given the current mix of our backlog, which includes some larger multi-year projects, our backlog conversion may be extended relative to our historical pattern in the coming quarters. Now, turning to our segment results, let's first look at E&M, where our third quarter revenue increased nearly 4% to $537 million. The increase was driven by higher workloads in our commercial and institutional end markets, particularly in the data center sub-market, partially offset by decreased workloads in the industrial, service, and renewables end markets. Our E&M EBITDA was $41 million in the third quarter, up from $34 million in the third quarter last year, which is an increase of 21%. This was the result of strong revenue growth solid project execution, and efficiencies. As a result, our E&M EBITDA margin improved 110 basis points to 7.6%. Our third quarter T&D revenue was $229 million, up from $205 million last year, or an increase of 12%, from growth in our transmission and underground submarkets within the utility end market, partially offset by the timing of work in our distribution business. We also benefited from strong growth in our transportation end market due to higher workloads in our traffic signalization and street lighting services. T&D EBITDA was $30 million in the third quarter of 2024, up from $28 million last year. Our T&D EBITDA margin was 13.3% during the third quarter, down 50 basis points from 13.8% last year, primarily due to project mix. Turning to our balance sheet liquidity and free cash flow. In October 2024, we entered into a senior secured credit agreement with our bank group consisting of a $300 million term loan A and a $225 million revolving credit facility. We drew down $40 million under the revolving credit facility as of October 31 to fund projected working capital needs. As we disclosed at our investor day on October 17th, our estimated net leverage would be approximately 1.3 times at the separation date. We generated free cash flow of $58 million through the first three quarters of 2024, up from $46 million in the same period last year. Our year to date CapEx was $35 million, or approximately 1.7% of revenue, versus CapEx of $28 million last year, which was approximately 1.3% of revenue. The primary drivers of improved free cash flow were higher net income and improved working capital. Wrapping up with guidance, as Jeff said, we are reiterating our 2024 guidance that calls for revenues in the range of $2.65 to $2.85 billion and EBITDA in the range of $220 million to $240 million, keeping the midpoints unchanged. with EBITDA margins higher than in 2023. It's important to note that our guidance is consistent with the construction services segment guidance that MDU Resources provided in the second quarter this year, and it does not include additional stand-up costs or synergies that we have discussed. We will reconcile our fourth quarter and full year results, which will include the synergies, to our anticipated range at the end of this year. We currently expect public company stand-up costs of approximately $5 million in the fourth quarter. Now, shifting from our near-term outlook to our long-term expectations, I would just like to wrap up with a few comments on our long-term framework. As Jeff said, based on our attractive market position, strong execution, and disciplined capital allocation, we are committed to delivering long-term organic revenue growth of 5% to 7% annually. We expect to deliver stable EBITDA margin performance with modest EBITDA margin expansion from ongoing project execution and operating leverage, resulting in expected annual EBITDA growth of 7% to 9%. Our framework is based on capital spending of 2% to 2.5% of revenue, which is slightly higher than historical levels as we will invest more in our growth opportunities. We will deliver these financial results while maintaining a targeted net leverage of one and a half to two times. That completes our prepared remarks. Operator, we are now ready for the question and answer portion of our call.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via loudspeaker on your device, please pick up your handset and ensure that your phone is not on mute when asking your question. Your first question comes from the line of Brent Tillman with DA Davidson. Please go ahead.

Thanks. Good morning.

Nice start there as a public company. Congrats. I guess first question, Jeff, just was curious, Jeff, anything more you can share in terms of the sources of booking strength in E&M? I mean, really strong this quarter. And then also just on your T&D backlog, it was a bit weaker. You know, what should we make of that, especially in context of what seems to be a pretty for a dynamic environment for utility spending on the grid over the next few years?

Yeah, thanks for the question, Brent. We're still seeing a high demand for our work in the E&M space. And with our diversified business, we are seeing our customers in the data center space, institutional, even hospitality in the Vegas area where they're seeking our services to partner and to be able to get us on board in pre-construction, so we have the ability to prefab and be able to get jobs done timely, within budget, and safely. As far as the T&D space, I think it's just project timing, and we continue to emphasize and support our T&D companies with capital on the work that they do, the transmission, the distribution, above ground, below ground. So I think it's more of a timing factor with the T&D space. With the diversification we have, we're real excited about what we've done in Q3 and off to a good start, as you said. Yeah.

Okay. I appreciate that, Jeff. And you've got a lot of interesting markets here that are clearly working well for you, but I think maybe you might admit some that are a bit slower, presumably, maybe more on the true kind of commercial side, Jeff. Could you just talk about some of those?

areas i heard you mention hospitality is actually okay but you know how challenging are those really for you and i guess does it matter just given your ability to ship resources to the areas that are working for you yeah that that's the key for us is to be able to anticipate and pivot and to be allocate resources to upcoming opportunities as we see projects complete the hospitality area has been great for us we've got exceptional companies in the Las Vegas area, and we've been able to complete some very complex projects on time and within budget and safely. So seeing some of those projects complete and cross-training our talented management and field staff, we've been able to pivot and to be able to move some of those resources into data center world and other geographic markets. So that's what we try to do to be flexible and nimble to be able to keep up with the demand for our services and build up on our backlog like we did in the third quarter at 2.9 billion, which is a record for us.

Yeah. And then maybe just a question in terms of the profile contracts you're adding into the backlog in terms of anticipated margins you could earn as you execute. Are they more attractive than bookings earlier this year, the same just, you know, given the margin improvement? this quarter, just trying to get some context on where this can potentially go with what you've got in hand.

Certainly, our disciplined approach to project qualification and selection is real important to be able to pick the right jobs where our customers want to partner with us or in other markets where we want to enter to look at the contracts and negotiate favorable terms and even more favorable terms today given the constraint on labor. And then it's all about execution. It's about planning our work safely and productively and prefabbing where we can and increasing our prefabrication resource base in addition to making sure that we're getting paid timely for the work we're providing. So I think the acumen of our people in the field And also in management, part of our business has improved through our repeatable playbook, and that has helped with our margin enhancement.

Very good. Last one, if I could, just maybe if you could talk about the acquisition pipeline you're cultivating. Is that both on the E&M and T&D side? You know, could you potentially talk about the potential size ranges of companies you're speaking to? You know, in that context, Jeff, what's kind of the sweet spot in your view in terms of the kind of transaction size, given that's part of the story or going forward?

Yeah, it is part of our story, and we continue to see opportunities across a variety of end markets and company sizes. The key is going to be to find the right company with the right culture that can complement our longstanding relationships and effectively execute our project playbook. So look at the multiples, which vary depending upon the type of businesses and the opportunity for our synergies that we would realize as we acquire a company. And when we look at companies, we want to make sure that we fully understand how a potential company that we would acquire, how do they get their work? Are they respected by their clients? Do they have exceptional field people? Do they have a good succession plan? All these components, in addition to the geographic expansion where we could serve customers in more locations, all very important, and all will be a part of our story going forward.

Okay. Very good. Thanks for taking the questions. Congrats again. Great momentum here. Thank you, Brent.

Again, if you have dialed in and would like to ask a question, Please press star on your telephone keypad. And your next question comes from Michael Dudas with Vertical Research Partners. Please go ahead.

Good morning, gentlemen, and well done last week. Good morning. Jeff, maybe, you know, looking at, you know, the outlook and some of the positive outlooks in your urban markets, how do the customers' expectations of quicker time to market their ability to want to have more diverse vendors and your union later access, is that important to allow you to gain share and maybe drive a more sustainable booking and revenue outlook as you move forward?

I think it's certainly a contributor to our ability to be able to secure and get selected for complex projects. The 82% of our workforce Being from the union is a big part of that. Highly skilled tradespeople are a majority of the employee count that we have within our business. So our customers understand that. They want to get their jobs done quicker and safe. They want to go to market with their product, and they rely upon us to be able to provide those highly skilled people both in the field and, of course, our management to be able to accomplish their goals.

I appreciate that, Jeff. And Max, when you're looking at these little catch up on capital and some of the growth areas, what kind of opportunities internally do you ever typically look at or looking at to enhance some of those opportunities? Is prefabrication access or ability something that's important as well?

Absolutely. And when we get selected for our capabilities, our experience, our safety or track record, We get on board early. We have the opportunity to be able to be an extension of the design team, to collaborate, to be able to provide those constructability reviews. And that is a platform for us to be able to increase our prefabrication. And there are so many benefits on a project, not only for us, but also the other trades and the owner. We'll have less congestion. We're able to move hours into a controlled environment where we have production and safety enhancements. So all these components that we share with our customers to share the value, the value add that we provide, they're understood and they're evaluated when we get selected for jobs early, even before the jobs are completely designed. That's really in our wheelhouse. We're good at it. We're always looking to get better. And that is one of the reasons why we've been able to build our business our diverse business up with our customers.

Excellent. Thank you, gentlemen. Thank you.

Again, if you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. And that concludes our Q&A session. I will now turn the conference back over to Jeff Seed for closing remarks. Please go ahead.

Thank you all again for joining us today. We are very excited about the opportunities ahead for Everest. We are scaled for success and we're built for growth. And we are confident that we are very well positioned to create long-term value as a standalone publicly traded company. We've enjoyed the opportunity to meet with many of you over the last few weeks, and we look forward to continuing the conversation in the coming quarters. Thank you for your time and for your interest in Everest. This concludes today's call.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.