Primoris Services : Q3 2022 Earnings Transcript

Corrected Transcript

08-Nov-2022

Primoris Services Corp. (PRIM)

Q3 2022 Earnings Call

	Total Pages: 17
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Primoris Services Corp. (PRIM)	Corrected Transcript
Q3 2022 Earnings Call	08-Nov-2022

CORPORATE PARTICIPANTS

Blake Holcomb	Kenneth M. Dodgen
Vice President - Investor Relations, Primoris Services Corp.	Chief Financial Officer & Executive Vice President, Primoris Services
Thomas E. McCormick	Corp.
President, Chief Executive Officer & Director, Primoris Services Corp.

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OTHER PARTICIPANTS

Peter Lukas	Brent Thielman
Analyst, CJS Securities	Analyst, D. A. Davidson & Co.
Adam R. Thalhimer	Julio Romero
Analyst, Thompson Davis & Co., Inc.	Analyst, Sidoti & Co. LLC
Jerry Revich	Avi Jaroslawicz
Analyst, Goldman Sachs & Co. LLC	Analyst, UBS Securities LLC

Sean D. Eastman

Analyst, KeyBanc Capital Markets, Inc.

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MANAGEMENT DISCUSSION SECTION

Operator: 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 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.

Blake Holcomb, Vice President, Investor Relations, you may begin your conference.

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Blake Holcomb

Vice President - Investor Relations, Primoris Services Corp.

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

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Primoris Services Corp. (PRIM)	Corrected Transcript
Q3 2022 Earnings Call	08-Nov-2022

the Investors 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.

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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 third quarter results and our business outlook for the remainder of 2022 and going into 2023.

The third quarter results for Primoris 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% for 2021, and organic revenue growth is up approximately 12%. This is impressive growth given the significant headwinds 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 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 8% 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 continued 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 Primoris 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 craft persons to our combined workforce to better serve our clients.

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Primoris Services Corp. (PRIM)	Corrected Transcript
Q3 2022 Earnings Call	08-Nov-2022

We witnessed the benefits of this increased labor force during the response to the aftermath of Hurricane Ian. Primoris 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 of 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 the 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 B Comm 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 [indiscernible] (06:08) Utilities 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 forgo further work with these clients and instead will shift our personnel and equipment resources toward strengthening relationships with customers that view us as a valuable service provider.

Looking next at our Energy/Renewables segment, organic revenue was up over 50% and gross margins more than doubled during the third quarter compared to Q3 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 Western Gulf Coast. 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-date compared to the first nine months of 2021. Our success in solar is one of the most underappreciated parts of the Primoris story, and we continue to exceed even our own expectations.

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Primoris Services Corp. (PRIM)	Corrected Transcript
Q3 2022 Earnings Call	08-Nov-2022

We've 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 adapt our standard practices, which have added a great deal of value to our customers' fixed priced projects and have minimized our risk 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, produce 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 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 our - of excess supply.

The passage of the Inflation Reduction Act or IRA in August only magnified 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 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 was another quarter of challenges to our profitability. The segment has fallen below our performance expectations for 2022 [ph] while (11:13) we were 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 larger [indiscernible] (11:41) we announced in September, which kicked off last month.

The integration of PLH pipeline, while only 10% of our Pipeline service this business has added complementary clients, regions and service offering to the segment, 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.

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