Primoris Services : Q1 2024 Transcript

Corrected Transcript

09-May-2024

Primoris Services Corp. (PRIM)

Q1 2024 Earnings Call

CORPORATE PARTICIPANTS

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OTHER PARTICIPANTS

Jerry Revich

Analyst, Goldman Sachs & Co. LLC

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MANAGEMENT DISCUSSION SECTION

Operator: Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to Primoris Services Corporation First Quarter 2024 Earnings Conference Call and Webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and- answer session. [Operator Instructions] Thank you.

I would now like to turn the conference over to Blake Holcomb, Vice President of Investor Relations. Please go ahead.

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Blake Holcomb

Vice President-Investor Relations, Primoris Services Corp.

Good morning, and welcome to the Primoris first quarter 2024 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'd 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, May 9, 2024. 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 our first quarter 2024 earnings press release, which was issued yesterday.

I would now like to turn the call over to Tom McCormick.

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Thomas E. McCormick

President, Chief Executive Officer & Director, Primoris Services Corp.

Thank you, Blake. Good morning, and thank you for joining us today to discuss our first quarter 2024 financial and operational results. Primoris had a solid start to the year, delivering improved revenue and margins compared to the prior year. Our teams across the organization are engaged and focused on executing on our strategy to improve profitability and cash flow, while leading with safe and productive performance. We continued to see momentum driving increased investment in infrastructure solutions in North American in three primary areas that are having a positive impact on our business. The energy transition, growing electricity demand and grid modernization, and the increase in facility construction to support a shift in the supply chain.

The transition to lower carbon emitting sources of energy is driving increased adoption of solar power generation, as well as natural gas generation to replace retiring coal plants and help bridge the energy transition. There is also a growing demand for electricity that is being driven by new facility construction, including data centers and chip manufacturing, which are supporting emerging technologies, we're adding critical component production capacity closer to the US.

Many of these new sources of generation will need additional transmission lines and substations to connect them to a grid that is already in need of modernization in order to maintain reliability and support higher electrical demand. We believe that these things are interconnected and will require sustained investment for an extended period of time, and we are well-positioned to capitalize on these themes in the coming years.

Now let's look at our performance for the quarter by segment. Starting with the utility segment, we had a couple of factors that led to lower revenue versus the prior year. First, we experienced more seasonal delays in the first quarter of 2024, driven by less favorable weather conditions in certain markets and a slower ramp-up in communication spending.

Second, while our MSA revenue increased from the prior year, we executed less project work during the quarter. This was primarily due to a major substation project that we were constructing this time last year that was completed in 2023.

Despite these impacts, we were able to deliver comparable margins, driven by good operational performance in gas operations and communications, which helped to offset a decline in the higher margin project work.

Building on our backlog and mix of project work remains a high priority for the utility segment to reach our target gross margin goals. Our project teams are actively evaluating a growing list of projects that we believe are well suited to our capabilities and address the market need for our customers. As we discussed on the fourth quarter earnings call, much of their focus right now is on supporting the power delivery needs of the renewables business. But this will continue to evolve as our teams estimate and bid more transmission and substation projects.

Turning to the Energy segment, we achieved significant top line growth and margin expansion driven by increased renewables and industrial construction activity. We initiated work on several new projects during the

quarter that were awarded during our record setting 2023. The growth in these businesses was able to more than offset the decline in pipeline revenues that we anticipated due to a lower backlog of projects to start the year.

Heavy civil also contributed top line growth and improved margins versus the prior year. In renewables, we began ramping up on three major projects, which are progressing at a high degree of efficiency, which helped drive the quarterly outperformance. This efficiency, combined with the timing of new project awards being pulled into Q4 2023, led to our revenue outpacing the booking of new work.

We ended the quarter with a healthy backlog of $2.1 billion, albeit slightly down from yearend. The solar portfolio of new projects remains robust and we expect to see bookings pick up in the second quarter that will resume our backlog growth. In fact, we are evaluating a couple of projects that, if awarded, would allow us to exceed our new business goals for the full year.

Additionally, we are seeing increased revenue contribution from adjacent services like battery storage and O&M that accounted for roughly 7% of renewables revenue in the first quarter. These services, along with high voltage work provided by our power delivery business, are still in the early stages. Still, we are encouraged by the progress we are making and believe that they will continue to offer a competitive advantage for us with our solar customers going forward.

Industrial construction was also a bright spot for the quarter. We had improved performance in our Canadian operations and commenced work on new projects in the western US that led to improved margins in the quarter. These drivers offset the timing of work being pushed into Q2 in our Gulf Coast operations. The funnel of opportunities in the industrial business is higher than we've seen in recent years and we believe we can continue to grow, while being selective in the projects we choose to build in the coming quarters. We expect that this will mitigate the loss of revenue from select subscale or low margin businesses that we will look to wind down or divest over the next several quarters.

Overall, we are pleased with our performance in Q1, which is historically our lowest quarter for revenue and earnings due to seasonality, particularly in the utility segment. We are in close contact with our customers to ensure that we have the appropriate level of crews and equipment to help them meet their 2024 objectives. While still early in the year, we are optimistic that our full year margin of cash flow goals are achievable and potentially beatable with successful execution and continued investment in our growth markets of renewables and power delivery.

Now, I'll turn it over to Ken for more on our financial results.

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Kenneth M. Dodgen

Executive Vice President & Chief Financial Officer, Primoris Services Corp.

Thanks, Tom, and good morning, everyone. Our Q1 revenue was $1.4 billion, an increase of $156 million or 12.4% from the prior year, primarily driven by strong growth in our Energy segment. The Energy segment was up over $245 million or 33.4% from the prior year, driven by strong growth in solar and industrial construction, as well as some work that was pulled forward from Q2 and Q3. The utility segment was down a little over $48 million from the prior year due to a decrease in project work and a slightly slower start to the year in communications, partially offset by increased MSA revenue. The majority of the decline in project work was due to the completion of a large substation project during 2023. We expect to see some choppiness in project revenue on a quarterly basis, as we continue to grow toward our preferred mix project work in this segment.

I also want to point out that we made a change in how we report segment revenue. Historically, we've reported segment revenue net of the intersegment eliminations, since it was material to our total revenue. However, starting this quarter, we are showing gross revenue for each segment and then separately showing the intersegment revenue deduction. We believe this more accurately reports the gross revenue and revenue growth of each segment and better illustrates the growing benefit of cross-selling services between our segments. An example of this is our power delivery group building substations and transmission lines for our renewable customers.

Gross profit for the quarter was approximately $133 million, an increase of $34 million from the prior year, primarily due to higher revenue and improved revenue mix. Gross margins were 9.4% for the quarter compared to 7.9% in the prior year.

Looking further at our segments, in the utility segment, gross profit was $29.5 million, down $4.1 million compared to the prior year. This was driven by the lower amount of project work and the slower start in communications work compared to the prior year. Gross margins of 6% were slightly below the 6.2% in the prior year, primarily driven by the lower project work, but still in the middle of our expected range of 5% to 7%. We expect to see margins move into our 9% to 11% range for the remaining quarters of the year.

In the Energy segment, gross profit was $103.9 million for the quarter, a $37.7 million increase from the prior year due to both higher revenue and improved margins. Gross margins were 10.5%, up from 8.9% in the prior year. The higher gross margins were a result of an improved mix from renewables work and improved margins in our industrial businesses in Canada and in the western US.

Turning to SG&A, expenses in the first quarter were $88.6 million, an increase of $10.6 million compared to the prior year, but in line with our expectations. The increase in SG&A is primarily due to increased personnel costs to support our growth. As a percent of revenue, SG&A was essentially flat to the prior year and we expect SG&A for the full year to remain in the low 6% range. Net interest expense in the first quarter was $18 million, down around $0.5 million from the prior year. The decrease was a result of lower average debt balances, partially offset by higher average interest rates. Our effective tax rate was 29% for the quarter and we believe this rate will be consistent for the full year, depending on the states in which we work and non-deductible components of per diem expenses. Earnings for the quarter saw a significant improvement from the prior year. EPS increased by $0.33 per share and adjusted EPS was $0.29 per share higher. Additionally, net income increased to just under $19 million, an increase of almost $18 million from the prior year and adjusted EBITDA increased to $73.8 million, up $20.9 million or 40% from the prior year.

Taking a look at cash flow for Q1. We saw our cash used in operations of $28.5 million. This was an improvement of around $87 million from the prior year. The primary drivers were an increase in deferred revenue related to upfront payments for future projects and higher operating income.

Looking at the balance sheet, we maintained strong liquidity of $451 million, which includes a $178 million of cash and $273 million in available borrowing capacity on our revolver. And our trailing 12-month net debt to EBITDA ratio held steady at 2 times at the end of the quarter. We could still see our ratio tick up into Q2 and Q3 based on seasonal working capital needs, but then trend back down as we near the end of the year.

Transitioning to backlog, we ended the quarter with $10.6 billion in total backlog compared to $10.9 billion at the end of 2023. Fixed backlog decreased $359 million during Q1, primarily due to the timing of booking new solar and industrial projects, following a strong fourth quarter of new awards. We typically see variability in new awards

from quarter-to-quarter and we expect to resume backlog growth in the coming quarters. MSA backlog was up $86 million from yearend, driven by a $182 million of backlog growth in utilities.

And now turning to our guidance, we are maintaining our full year EPS guidance of $2.50 to $2.70 per share, adjusted EPS guidance of $3.05 to $3.25 per share and adjusted EBITDA guidance of $395 million to $415 million for the full year 2024.

The strong start to the year gives us increased confidence that the higher end of our guidance range is achievable if we continue to see positive momentum across our end markets. We will further assess our guidance as 2024 unfolds and we learn more about the specific timing and scope of new awards.

With that, I'll turn it back over to Tom.

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Thomas E. McCormick

President, Chief Executive Officer & Director, Primoris Services Corp.

Thank you, Ken. Before we open up the call for questions, I want to highlight key points of the strategy we laid out at our recent Investor Day that will drive our decision-making for the next three years. Our objective is to grow gross profit at a 9% to 12% annual rate through 2026 and improve operating cash flow to 4% to 5% of revenue. We will accomplish this by investing in our renewables and power delivery growth engines, while sustaining our foundational businesses performance through consistent execution, focused capital allocation and purposeful customer growth. This begins with prioritizing profitable growth in the right markets with the right customers. We will continue to do what we say we're going to do for our customers, employees, and shareholders with the goal of deploying resources to the highest returns in our portfolio. We may not be the largest service provider in all of our markets, but our aim is to be best allocators of capital in order to generate the best returns.

We are still in the initial stage of driving operational improvements to meet our longer-term margin and cash flow goals. We are starting to see the results of this initiatives with a strong start to 2024. We believe we have the right teams in place to continue marching toward these goals and look forward to further safe, consistent and high- quality execution by our employees to the benefit of our customers and shareholders.

We will now open up the call for your questions.