Primoris Services Corporation

Good morning. My name is Amy and I will be your conference operator today. At this time, I would like to welcome everyone to the Primoris 2020 fourth quarter and year end earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's 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, you may press the pound key. It is now my pleasure to introduce your host, your host, Brooke Wilson, Vice President of Investor Relations. Please go ahead.

Thank you, Amy. Good morning and welcome to Prime Morris' conference call. Joining me today are Tom McCormick, Chief Executive Officer, and Ken Dodgen, Chief Financial Officer. Before I begin, I would like to make everyone aware of certain language contained in our safe harbor statements. 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 only as of today. We decline any obligation to update these statements except as may be required by law. I would now like to turn the call over to our CEO, Tom McCormick.

Thank you, Brooke. Good morning and thank you for joining us today to discuss our 2020 fourth quarter and full year results. We had an incredible year despite social unrest, a pandemic, a significant reduction in the price of oil, as well as a presidential election. Good weather in the fourth quarter allowed some of our business units that typically shut down after Thanksgiving to work all the way through to the end of the year. This is a nice boost and a great way to close out 2020. The numbers paint a clear picture of the success of our strategy, even in a difficult market, as we announced record revenue of $3.5 billion for the full year, up 12% compared to last year. Our earnings per share for 2020 came in at $2.16 per fully diluted share, another record for the company. Reflecting on our strong overall performance in the cooperative weather in December, Our fourth quarter revenue was up 13.6% over the prior year at $897.3 million. Our pipeline, power, utilities, and transmission segments generated especially strong revenues in the fourth quarter. I want to send a special thank you to all of our employees whose hard work and commitment to work safely enabled the company to have the success that we all experienced this year. Now let's look at our segments. Our pipeline and underground segment had exceptional topline growth for the full year 2020, coming in at almost $900 million, up 77.6% compared to full year 2019. This was mostly due to pipeline projects in Texas that began in the first quarter of 2020, partially offset by the cancellation of a pipeline project in the Mid-Atlantic and the substantial completion of a pipeline project in 2019. Our field services were able to produce strong results for the year despite the challenges encountered with the drop in the price of oil as well as the pandemic and hurricanes that struck the Gulf Coast last year. Turning to our power, industrial, and engineering segment, revenue increased by 9.1% from $729.3 million in 2019 to $795.4 million in 2020. This growth was driven by solar energy projects and progress on an industrial project for a customer in California. The renewable solar market continues to grow. We began work on a new 380 megawatt solar project in the fourth quarter in Nevada. Also during the quarter, we were selected as the EPC contractor for two large solar projects in Texas totaling 885 megawatts that will begin this quarter. During Q4 2020, we completed phase four engineering services on a green diesel project located on the Gulf Coast, and we continue to make progress on the previously mentioned renewable project in California. We experienced higher costs associated with an LNG project in the Northeast in 2020 that has impacted our margins. We expect the project will complete by late Q2 and commission in early Q3, and this issue will then be behind us. It's worth noting that all other projects being executed within this segment are performing to plan or better. In our utilities and distribution segment, increased productivity and activity with our customers resulted in revenue growing from $886.5 million in 2019 to $900.6 million in 2020. This segment operated at full capacity. The weather was good, our crews worked safely and productively, and our major customers spent their budgets with few interruptions. We also completed mobilization on a new MSA contract in the western region of the U.S. and believe this will be a long-standing relationship with numerous growth opportunities. Our transmission and distribution segment recorded revenue of $459 million in 2020 compared to 497.3 million the previous year. We have been more selective in the type of work we perform, and we also benefited from an increase in storm work during the year. We completed our restructuring of this segment in Q1 of 2020, which has resulted in improved performance, better contract pricing, a management reorganization, and reduction of indirect costs. We expect this momentum to carry us forward into 2021 and beyond. Storm remediation work performed by our crews provided positive margins during the fourth quarter. as we responded to storms that occurred in the Midwest, Gulf, and Mid-Atlantic regions. Origins also benefited from improved project performance on our transmission projects. Our civil segments revenue for 2020 was $433.5 million, down 11.2% from $488 million in 2019. The decline was primarily due to lower textile work volumes and the substantial completion of a project with a major refining customer and an ethylene project in 2019. Despite the modest decline, our management team remains focused on project execution and the results are showing. We continue to be very selective in the civil work that we bid and as a result, a segment performed within our target margin range. Our civil projects in Louisiana perform well too. Although the same active storm season that brought storm work to our T&D group negatively impacted the Louisiana projects to some degree, especially hurricanes Delta and Zeta. As I look across all of our segments, I am extremely proud of not only their financial results, but also their safety results. I want to thank our management teams and employees for their focus on workplace safety during the year. Our team has worked over 27 million work hours and our total recordable incident rate for 2020 was one of the best in the company's history at 0.53, well below the industry average. During the year, we received numerous safety awards. ARB was named the overall winner of the California Plumbing and Mechanical Contractors Association Safety Star Award and winner of the Safety Star Award. ARB Underground was awarded the Arthur T. Everham Safety Award by the Distribution Contractors Association in the $2 million and over work hour category. I&M earned the Division I Greater Baton Rouge Industrial Alliance Award and Primoris Canada won an Excellence Award during the 2020 Canada's Safest Employer Award Ceremony. As happy as I am to put 2020 in our rearview mirror, I'm excited to talk about where we are headed in 2021. To take advantage of the opportunities we see and create a stronger platform for our growth, we reviewed the organizational structure of our operations and in January announced that we are streamlining it to function more efficiently as well as to facilitate collaboration and cross-selling. With that, we have reduced our number of segments from five to three. The new utility segment combines our gas utilities and distribution segment and the electrical transmission and distribution segment as well as the telecom services acquired through the acquisition of future infrastructure. The new energy segment consolidates the power, industrial and engineering segment and the civil segment. The pipeline services segment will be the new name for the pipeline and underground segment which retains its current structure. Simplifying our structure makes so much sense. The difference between business units in each segment share a lot of the same clients. Excuse me, the different business units in each segment share a lot of the same clients. So if you can get all of them working together, we can self-perform a larger portion of the work that we have, create multiple revenue streams, which ultimately drives our margins and take advantage of the synergies throughout the various business units. So what do we see for 2021? I want to touch briefly on some segment highlights and then address two areas with wider implications for our prospects going forward. The recent addition of future infrastructure to our family of companies and the new presidential administration. For our utility segment, which once again includes our gas and electrical transmission and distribution businesses and our new telecom business, we are well positioned for continued improvement and overall business growth by building off the momentum created in 2020, as well as expanding our geographic reach and client base. Last week's utility crisis in Texas is just one more indication of the need for infrastructure work. Gas, Electric, and Telecom are all MSA-based markets, and our focus moving forward is to maximize synergies and scale, continue to improve productivity, and increase our market share. The telecom market continues to be strong. We have secured MSAs with two telecom companies in the western region and should start performing work in the first quarter of this year. For the energy segment, which again incorporates the power, industrial, and engineering business, and the civil business, There is a lot to say about renewable energy under the new administration, and I'll come back to that in detail. Meanwhile, we are watching how state spending levels, especially in Texas, may affect our civil projects. TxDOT historically spends $8 to $9 billion a year, and this could slightly decrease due to declines in oil and gas tax revenues. For the pipeline services segment, given the headwinds in the industry, we expect to see fewer new pipeline projects. The good news is our pipeline segment already has over 40% of their 2021 plan in backlog and they continue to pursue other projects. Over half of the operating pipelines in the United States are past their design life, with some being more than 50 to 60 years old. In addition to the age of these pipelines, some have other potential challenges such as missing or poor coding, anomalies, or perhaps due to their age being built without modern manufacturing or construction techniques. The government just issued a new mega rule expanding the requirements for verifying, monitoring, and improving pipeline integrity. This new rule requires all pipelines to verify their maximum allowable operating pressure in order to be able to remain in service. If the minimum pressure is not met, the pipeline will have to be upgraded, repaired, replaced, repurposed, or decommissioned. We are repositioning our pipeline segment to take advantage of our field services capabilities in order to help our customers respond to these rules and all their pipeline integrity, maintenance, and construction needs. Looking more broadly, let me talk about our acquisition of future infrastructure last month. This is an exceptional fit with Morris and it checks all the right boxes for the criteria we laid out when we started looking for our next major acquisition several years ago. It catapults us into telecom market. Telecom Services is a high growth market that will continue to grow well into the future, riding the tailwinds of our increasingly digital world. It further strengthens our existing utility capabilities, giving us a larger footprint within which we can leverage the value of our Primoris brand, our strong customer base, and our expertise. And it moves us further away from pure engineering and construction into a business with higher margin growth potential and recurring revenue via MSAs, which is exactly the direction we want to continue to move our portfolio. This is an extraordinary fit in a defining moment for Pomorris. I am happy to report that the integration is going extremely well. We are slightly ahead of plan. The leadership of FI is extremely energized to be part of Pomorris. They have all committed to staying with the company and have even signed employment agreements. They are excited about being part of the Pomorris family of companies and we are beginning to enter new geographical areas to expand our telecom presence. We have already started to realize the synergies we identified, and we expect we will save at least $10 million. Of that, we should be able to recognize $5 million this year and the remaining $5 million and any additional upside within the following 12 to 18 months. Finally, I'd like to discuss our prospects under the new presidential administration. We all have seen that the domestic energy industry has been under pressure for the past several years. Although our pipeline segment had a record year, this will affect our pipeline construction opportunities going forward. and drilling restrictions may continue to suppress new construction even as the economy recovers and demand rises. Another concern would be the possible increase in corporate taxes. But there are also areas where we see that the new administration's priorities create significant opportunities for remorse. First, President Biden has stated that he wants to make infrastructure rebuilding a priority. As I noted earlier, the nation's gas pipeline infrastructure is aging and in need of attention. On a broader scale, replacing other aging infrastructure such as roads and bridges also creates opportunity for Primoris in our industrial, engineering, and heavy civil businesses. Second, the Biden Administration is ready to pursue renewable energy on a large scale, and this dovetails with our increasing activity in the renewable energy markets. In 2018, Primoris earned $45 million in revenue from renewable energy projects, which equated to less than 2% of total company revenues. In 2019, we announced approximately $170 million in solar projects to be constructed in 2020 and 2021. In 2020, we announced approximately $470 million in solar projects to be constructed in 2021 and 2022. We have over $430 million in backlog for 2021 and renewable projects. We have been unofficially awarded $570 million of other projects that will likely turn to backlog in 2021 and 2022. This means that during the course of 2021, we could have as much as a billion dollars of backlog that will be executed just in solar projects in 2021 and 2022 alone. We are very careful as to how we select the projects we take and the clients we work with. Solar projects also creates cross-selling opportunities. A solar project requires transmission lines and substations to support it, which creates opportunities for a new utility segment. On a typical solar project, we have had as many as four Primoris business units doing some level of work on that project, including I&M to do the site preparation and Heavy Silver to build the access roads. Solar isn't our only renewable market. We are also evaluating whether to expand it to wind, but only for specific scopes. We're not going to make a huge investment to buy large cranes that allows us to set turbines and fan blades. However, we will perform site clearing and grading, construct roads, complete underground installations, including the foundation work and duct banks. We can also pull and terminate cables, construct the transmission lines to the facility, as well as design and build the substations. There's a lot of opportunity there. We are currently working on green diesel and biofuels projects for clients in the Gulf Coast and out West. We are retrofitting a refinery for biofuels on the West Coast that is a $200-plus million project. We have another $50 million project for another client on the Gulf Coast where they're modifying a refinery to make green diesel. We have seen the political landscape and clients leaning more and more towards renewables. We've been actively looking at different ways we can help our clients and we are not done yet. We want to be smart about which clients we work with, what projects we execute, how we estimate these projects, and how we staff the project we're awarded. We're going to continue to grow our renewables group organically, although we may look at an acquisition if the right target were to come up, but it would have to be the right fit with the right culture. Another area that's going to impact our business is a rural broadband initiative, both on a national and state level. The pandemic has exposed that existing network infrastructure has a significant shortage of bandwidth, not only in the metropolitan areas, but also in smaller towns and cities. In Texas, Governor Abbott recently signed a rural broadband initiative for our state and I believe other states will follow. We've been told that the demand for broadband is doubling approximately every six months. And while the pandemic has driven the urgent demand now, the longer term picture is also promising over the next 10 to 15 years. And with that, I'll now turn it over to Ken.