Primoris Services Corporation

Thank you for standing by. At this time, I would like to welcome everyone to the Primoris Services Corporation third quarter 2022 earnings conference call-in webcast. 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, again, press star one. Thank you. Blake Holcomb, Vice President, Investor Relations. You may begin your conference.

Good morning, and welcome to the Primoris Third Quarter 2022 Earnings Conference Call. Joining me today with prepared comments are Tom McCormick, President and Chief Executive Officer, and Ken Dodgen, Executive Vice President and 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 only as of today. We disclaim any obligation to update these statements except as 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 investor section of our website in our third quarter 2022 earnings press release, which was issued yesterday afternoon. I would like to now turn the call over to Tom McCormick.

Thank you, Blake. Good morning and thank you for joining us today to discuss our third quarter results and our business outlook for the remainder of 2022 and going into 2023. The third quarter results for Primora showed solid execution in the overall strength of our market position as we set new records for both revenue and backlog. The strong quarter was a fundamental driver of progress in our 2022 year-to-date results. Revenue year-to-date is up over 18% from 2021, and organic revenue growth is up approximately 12%. This is impressive growth given the significant headwinds that we are facing this year in our pipeline services segment. Despite some continued headwinds from both the pipeline segment and inflation across the board, gross profit was up almost 22% from the third quarter of last year and up 68% from the second quarter of 2022, as we benefited from higher revenues and rate increases that we negotiated with a number of our key clients to ease some of the inflationary pressures. Similarly, our backlog has roughly doubled from the third quarter of last year to $5.5 billion. of which nearly 80% is organic growth from our utilities and energy renewables segments. We have also achieved the highest level of backlog in our pipeline services segment since the second quarter of 2020. We recently announced another $400 million of awarded projects in our energy renewables segment across our solar, power, and heavy civil businesses that are not reflected in these totals. We will begin working on a number of these projects during the fourth quarter and expect that our backlog will continue to gain momentum as we close out the year to position us for a strong 2023. With that, I'll provide some commentary on each of our segments. Beginning with utilities, we delivered margin recovery in the third quarter despite the labor and fuel inflationary impacts that continue to have some impact this quarter. Revenues also increased both sequentially and year over year, as we continue to grow our communications business across our utilities footprint. We also saw strength in our gas and electric businesses in our west region and realized additional contribution from the PLH acquisition that closed on August 1st. Most of you are familiar with PLH from our past several updates, but let me reiterate a few of the reasons we are excited about them becoming part of the Pomoros family of companies. First, it aligns with our strategic focus on higher growth, higher margin markets, including power delivery, communications, and gas utilities. It adds new customers with MSA contracts while bolstering our footprint in new and existing areas that are some of the fastest growing in North America. And perhaps most importantly, it adds 1,300 skilled craftspersons to our combined workforce to better serve our clients. We witnessed the benefits of this increased labor force during the response to the aftermath of Hurricane Ian. For Morris was able to send approximately 700 employees to help restore power delivery to our neighbors in the regions affected by the storm. For perspective, this was more than double the number of crew workers we deployed to assist with Hurricanes Nicholas and Ida in 2021. While the number of storms through the third quarter this year were lower than normal, Ian hit areas of the southeast particularly hard, and we were glad to be able to assist in getting power delivery back up and operating in those communities. Integrating PLH and maximizing its potential in our organization will take some time and there will likely be some bumps in the road along the way, but we are confident in our ability to maximize our return on this investment in the years ahead. In our communications business, we've moved past some early growing pains and pandemic-related delays to generate a great third quarter, as both revenues and margins grew at least 50% from the third quarter last year. The acquisition of BCOM has been a nice addition to our growing communications division, that has significant tailwinds in the coming years from the increases in anticipated broadband spending. We are also capitalizing on our ability to bring these services to customers in areas that we already have a relationship with on the electric utility side, which has helped grow revenues and margins over 27% year-to-date from the same period in 2021. While we expect to see continued top-line growth in utilities heading into Q4, some inflationary pressures and supply chain constraints persist. We remain proactive in positioning ourselves to best manage our labor costs and are working with those customers that have upcoming MSA renewal discussions to address these higher inflationary costs. We are having transparent discussions with some customers in certain regions that have been less profitable or reluctant to work with us on rates. In some of these cases, we are opting to forego further work with these clients and instead will shift our personnel and equipment resources towards strengthening relationships with customers that view us as a valuable service provider. Looking next at our energy and renewable segment, organic revenue was up over 50% and gross margins more than doubled during the third quarter compared to G3 2021. Through the third quarter of 2022, organic growth is up 34% and gross margins up almost 50% compared to the same period of 2021. This substantial growth came primarily from our industrial and utility-scale solar businesses. On the industrial side, we've seen a rebound in revenue and margins coming from a nice backlog of projects on the west and gulf coasts. We also moved past some projects that have been a consistent overhang on profitability in previous quarters and promoted some new leaders over certain businesses that are now yielding results on improved execution. The prospects for a healthy funnel to add to our backlog are very favorable, as is the potential for internal synergies between businesses as it relates to large utility scale solar, renewable fuels, and green hydrogen. Looking further at solar, we continue to excel as one of the top solar project design and construction companies in North America, being highly capable in both utility scale and distributed generation projects. Revenue and gross margins have approximately doubled from the third quarter of last year, and are up over 70% year to day compared to the first nine months of 2021. Our success in solar is one of the most underappreciated parts of the Primora story and we continue to exceed even our own expectations. We have worked hard to develop the right teams and be selective in working with the right client that allows for efficient, highly productive repeat business. We expect to have over $1.3 billion in backlog as we close this year. which is a 30% increase from the end of 2021 and will keep us working through 2023 and beyond. The low availability of modules has caused delays in getting some of our clients' projects completed and online. However, we've been able to keep our teams utilized by completing the projects to the point of module installation, moving on to the next project, and then returning with a smaller contingent of craft persons to complete the project once the modules arrive. We continue to train and develop new project teams to learn and adopt our standard practices, which have added a great deal of value to our customers' fixed-price projects and have minimized our risks in constructing them. Many of our clients are of the opinion that the supply of modules should come back by mid-2023, and others are making investments in building facilities, producing their own modules, and rely less on foreign and third-party suppliers. In addition to building more project teams to meet the growing demand in solar, We have also been staying ahead of potential cost inflation or supply chain challenges by either stocking or obtaining firm commitments from key suppliers for critical items that we provide in solar construction. This will help ensure that when our customers are ready to move forward, we will be ready to move forward with them. We have also started manufacturing certain components in-house that will lower our costs and serve as a revenue stream in the form of sales of excess supply. Passage of the Inflation Reduction Act, or IRA, in August only magnifies the opportunity in solar. Our customers are still evaluating this legislation, but there is a lot of enthusiasm that we will see tailwinds in the market for the next 10 to 12 years. As our customers navigate through the bill to maximize their benefit, we are also analyzing how we may benefit from the incentives outlined in the bill. For example, we are well positioned to take advantage of incentives for contractors with apprenticeship programs that allow our employees to develop their craft and skills, a competency that new entrants may not possess. We are also optimistic that the IRA will open additional avenues for our energy renewables segment to grow beyond solar. This includes opportunities in green hydrogen and wind that could also benefit greatly from the incentives in the bill. Wrapping up the segments with pipeline services, Despite revenue uplift related to PLH, it was another quarter of challenges for our profitability. The segment has fallen below our performance expectations for 2022, but we are moving past some problem projects and are working toward a renovated segment focused on profitability and cash flow. We recently introduced new leadership to oversee this segment and are already beginning to see results of staying focused on project execution and discipline. We are also seeing bid activity begin to improve, particularly in the Gulf Coast region on projects that will connect producers to nearby processing and LNG export markets. This includes the large award we announced in September, which kicked off last month. The integration of PLH pipeline, while only 10% of our pipeline services business, has added complimentary clients, regions, and service offerings to the site, particularly in field services, where we think that we have a lot of opportunity to grow our integrity, maintenance, small capital project work with improved profitability. During this time of federal permitting challenges, repair, rework, and maintenance of existing infrastructure will be necessary to keep the flow of energy moving. We also see opportunities to participate in markets outside of traditional oil and gas to midstream projects that will move carbon dioxide, hydrogen, and other liquids. These projects will require investment in new infrastructure and in some cases span hundreds of miles. We believe we are well positioned to capitalize on these projects given our expertise and mix of union and non-union craft labor. Overall, while Pipeline Services remains a smaller piece of our business, we are confident that focusing on project selection and performance going forward, we will see solid contribution to our bottom line from this segment in future quarters. Across all of our segments, Primoris is investing in the people and equipment necessary to meet the growing infrastructure needs of North America. We have made strategic acquisitions that have expanded our service offerings, customer base, and geographic footprint, while continuing to grow organically with long-standing customers and in new markets. I'll now turn it over to Ken to talk about our financial performance for the quarter.