Primoris Services Corporation

ladies and gentlemen thank you for standing by my name is cheryl and i will be a conference operator today at this time i would like to welcome everyone to the primoris service corporation third quarter earnings conference call and 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, press star one again. I would now like to turn the call over to Vice President of Investor Relations, Blake Holcomb. Please go ahead.

Good morning, and welcome to the Remora's 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 may be 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 in our third quarter 2023 earnings press release, which was issued yesterday. I would like to turn the call over to 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 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 Promores. 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 risks to our industry and the global economy, Over the past several years, we believe we are positioned 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'll 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 have seen a decline in customer spending compared to 2022 levels, but we have been encouraged by our ability to adjust our costs 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 sign 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 Promorse's 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, but 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 right-sizing our organization in areas that are not. Our ability to adjust to changes in 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 strengths 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 multi-year period. Wrapping up the energy segment, the renewables business remains a solid contributor to this segment and promotes overall. Revenue and gross profit reached record highs 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 new 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 remains 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's 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's 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 exist that 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'll now turn it over to Ken for more on our financial results.