Q3 2021 Primoris Services Corp Earnings Call
Good day and thank you for standing by welcome to the primary Services Corporation third quarter earnings Conference call. At this time all participants are in a listen only mode. After the speaker's presentation. There will be a question and answer session to ask a question. During the session you will need to press star one on your telephone.
Please be advised that today's conference is being recorded if you require any further assistance. Please press star zero and I like to hand, the conference overdue Speaker today, Mr Brook, Wootton Vice President Investor Relations. Please go ahead.
Good morning, and welcome to buy more of the third quarter earnings Conference call. Joining me today are Tom Mccormick, President and Chief Executive Officer, and Ken Dodgen, Our Chief Financial Officer before we 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 are forward looking statements represent our outlook only as of today, 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 Investor Relations section of our website.
I would now like to turn the call over to Tom Mccormick.
Thank you Brook.
Good morning, and thank you for joining us today to discuss our third quarter results and our financial outlook for the remainder of 2021.
Our results show the strength of our overall business model and the strategic value of the acquisitions. We've made in recent years. These acquisitions position us in key markets as our economy moves toward a zero carbon future.
This is especially evident in our growing backlog.
All along we've said that we have tremendous opportunities in prospective projects and while we announced some contracts in the third quarter. The fourth quarter is shaping up to be even stronger.
<unk> hundred $30 million Solar project, we announced last week is a good sign of things to come in this market.
Reflecting our confidence in our future prospects on November three our board of directors authorized a share repurchase program for the repurchase of up to $25 million of outstanding common stock.
The share repurchase program, we can depending on market conditions share price and other factors acquire shares of our common stock on the open market or in privately negotiated transactions. Our board will reexamine. The program again at the end of December 2022, when it expires.
You will also note that in our earnings release that we added some non-GAAP calculations. We hope this will make it easier for investors to compare our results with those of our peers on an apples to apples basis.
Year to date, our revenue was $2 6 billion.
This was driven by our utility segment revenue, which was up 21% and our energy renewable segment revenue, which was up 16% over the same period last year.
Year to date net income was $86 2 million up eight.
18% compared to last year.
Our nine month EPS is $1 63, which is a 9% increase as compared to the same period in 2020.
That increase was especially significant when you consider that we have the $4 5 million additional shares from our secondary offering in the first quarter.
When you look at our full year EPS from 2017 to 2020, the CAGR increased over 15%.
In addition, our strategic focus on Master service agreements is continuing to show results with 53% of our current backlog made up hope MSA based work. This is another record level for us.
For the third quarter, we generated $913 $2 million of revenue.
Our solid performance in the utility and energy renewables markets demonstrates that our investment in these areas over the past several years continues to provide solid returns our pipeline segment revenue decreased by close to 50% as compared to the prior year. However in 2020, we substantially completed the $127 million pipeline project. During this time.
Period.
Now, let's look at the three segments in detail.
Our utility segment had a strong third quarter performance revenue came in at $454 $7 million that is a 10% increase compared to the same period last year.
This increase was primarily due to the addition of future infrastructure, which represented approximately $65 $1 million of revenue for the quarter.
We continue to make progress on the integration of future infrastructure.
The integration activities of more than 85% complete having completed 450 of the approximately 520 activities.
Even as revenue rose some of our operations continued to experience delays associated with customer design material shortages and slower permitting processes.
This is all part of the Covid hangover impact, which is a market wide challenge that we've previously discussed.
However, we are now starting to see work that was held back earlier in the year ramping up and we expect it to be released in the first quarter of 2022.
Major operations activities during the quarter included sending approximately 300 crew members to assist with the power restoration efforts in the states along the Gulf Coast that were heavily impacted by Hurricanes auto Nicholas.
Our utility group continues to enter new geographic markets. As an example, during the quarter, we signed an MSA for emergency storm services with our northeast electric utility provider. This provider serves approximately one 4 million customers and 29 different counties.
We are targeting this market for additional work and should start to gain momentum over the next six months.
Future infrastructure expanded its customer base and presence with the execution of new contracts to install aerial and underground fiber optic cable across the state of Texas.
Two specific contracts to note include a $50 million two year MSA with a two year optional renewal and an additional $16 million to your MSA.
Both of these master services agreements will provide communication services to historically underserved communities. This work began during the third quarter of 2021.
It is clear that the acquisition of future infrastructure is already bringing us opportunities as demand for data bandwidth continues to grow and we expect billions of dollars actually we expect tens of billions of dollars of further investment in <unk> and fiber networks to be required in order to keep up with the demand.
We will continue to create synergies between future infrastructure and our other business units that will help create growth for our overall business.
Now turning to our energy renewable segment.
Revenue increased to $351 million for the quarter that is an 11% increase over the same period the prior year.
The biggest contributor was renewable energy activity, which grew by $67 $9 million.
Operationally, we continue to make progress on the LNG project in the northeast and we expect this project to be completed in the first quarter of 2022.
The project is currently in the final stages of pre commissioning activities of its mechanical systems.
Turning to contract activity I mentioned last quarter that we were in late stage discussions regarding our thermal power project in southwest and.
In late August we secured this $100 million 200 megawatt projects, we've already begun the engineering and procurement and have recently mobilized to the field the projects should be completed in the second quarter next year.
In addition, we have over $800 million in prospective projects.
Many of these projects are currently working under a limited notice to proceed in anticipation of a full contract award.
Final contracts for these projects should be executed over the next quarter.
Two of the LNG piece, we mentioned last quarter for initial engineering work and long lead procurement on utility scale solar facilities were finalized in the third quarter.
One was for 101 megawatt project located in the Midwest. The second was for 185 megawatt project that is located in the southwest.
Initial construction on both projects will begin work in Q4, this year and will extend into the second and third quarters of 2022.
In addition, we recently announced another solar project award with an estimated value of $130 million.
Waters for the engineering procurement and construction of a utility scale solar facility in the southwest.
Early construction is scheduled to begin in the first quarter of 2022.
<unk> of the project is expected in the fourth quarter 2022.
Our level of expertise and quality execution on solar projects are creating repeat opportunities from our clients. We are currently working with quantum multiple solar projects and they have recently awarded US a fourth project.
This client has indicated they would like to partner with <unk> for multiple project teams on several projects over the course of the next three years.
One of them Morris is strongest in lease depreciated assets our customer relationships.
We have contracts with companies that we have been working with on a relatively continuous basis for 20 years and longer through multiple contract types and contract renewals and now we're building that same level customer relationships in the solar market.
And beyond solar other renewable natural gas and gas to liquids projects that were deferred during the pandemic are now moving into a front end engineering.
As an example, we are set to perform the front end engineering on Yosemite clean Energy's renewable biofuels projects.
Sylvia we use gasification technology to convert farm and forest wood waste to syngas and ultimately into carbon negative green hydrogen and renewable natural gas. This project takes advantage of our extensive experience in syngas and hydrogen and renewable natural gas production.
In October we announced seven energy renewable heavy Civil project awards with a combined value of over $115 million. These.
These projects are located across the southwest the awards start dates begin as early as the fourth quarter of 2021 and to end in a range from the back half of 2023 through mid year 2024.
The 225 billion renewables market continues to expand and we are positioned to grow with at a recent U S. Department of Energy study noted that by 2035 solar energy has the potential to power 40% of the nation's electricity.
This study also indicated that in order to accomplish this annual solar capacity additions, where installs will likely need to quadruple over the next decade that means going from 15 gigawatts per year in 2020 to close to 60 gigawatts per year in 2003.
The report also highlights the need for new tools that increased flexibility. This includes storage and advanced burgers as well as transmission expansion that will help move solar energy to all parts of the country.
All of this grid modernization fits perfectly within our capabilities and will drive our growth for years to come.
We will have over $1 billion in backlog as we close the year for work associated with 2022 and 2023 solar projects.
Even as we build our backlog of renewable energy projects are more traditional heavy civil business continues to perform well we have been notified of an award and are in the process of a contract execution on our Gulf Coast project that is scheduled to commence in Q1 of 2022 and extend into 2027.
The energy renewable segment backlog will increase to approximately $1 $7 billion by the end of the year with the addition of this project.
Moving onto our pipeline services segment.
After an exceptional 2020 this year continues to play out more in line with its 2019 performance.
Revenue came in at $107 6 million for the quarter.
Well this is a decrease year over year, which is slightly ahead of our expectations for the quarter.
One contributor was the higher productivity, we achieved from the outset of a major pipeline projects, which we completed all of the mechanical work during the quarter and.
In August Hurricane impacted most of our projects along the Gulf coast, including this one.
We're currently completing our punch list items and expect project completion and acceptance by the customer this quarter.
And the other pipeline projects in Nevada was completed on schedule in significantly under budget.
This benefited this segment's Q3 results.
Most of our other pipeline projects are on track we had two large projects operating ahead of plan and on budget, we anticipate a west coast project will resume in early Q4 early to mid Q1. This project recently experienced delays associated with approvals and permits.
As we expected the increase in commodity pricing as well as some renewed understanding of the need for reliable affordable dispatch will energy across the world has increased the project development activities of our customers.
The push towards carbon neutrality has led to additional opportunities for construction of renewable natural gas pipelines. We are seeing major carbon capture projects being released for bid, including one of which is terribly budgeted for $350 million to $400 million just for the facilities work alone.
This is a reminder, that our expertise extends across all types of pipelines, whether it be transporting natural gas crude oil refined products ngls carbon dioxide or water.
The mortgage pipeline is working with more renewable energy to utilize some of their pipeline resources and expertise in order to help free expanded capacity.
This will help us leverage the project execution and management expertise that exists across all of <unk> business units now moving back to the big picture across the board. We are focused on working with our customers to address and alleviate supply chain issues that means we are ordering materials ahead of our normal schedule, we are increasing our capex to order equipment now for delivery in 2002.
93.
We are also focused on being disciplined about the projects, we undertake but we stay true to our strategy and manage our risk profile.
And as always we are focused on the health and safety of our workers.
Across our businesses, we maintained our superior safety record for the first nine months of the year. Our total recordable incident rate was 0.53, which is ahead of our corporate target of 0.60.
As of the end of September 16 of our 19 business units had zero loss time injuries and five of the 19 business units had zero recordable injuries year to date.
COVID-19 remains the health and safety a priority.
We continue to follow CDC guidelines as well as protocols established by our clients for their sites.
We also continued to encourage our employees to get vaccinated.
In regards to the vaccine the testing mandate for companies with more than 100 employees. We are watching this go through the various legal hurdles and are in the process of creating a plan to comply with whatever is ultimately required by osha.
We are designing a plan that addresses four elements first of all validation and or documentation relating to which employees are vaccinate and.
Second testing of unvaccinated employees to meet the requirements determined by Osha.
Third evaluating the impact this will have on our multiple labor agreements and finally evaluating the legal implications to our contracts in msas with our clients.
Before I hand off to Ken for a review of the numbers I want to take a moment to look forward.
As you can see we are well positioned to meet the needs of the changing energy infrastructure across North America.
As it transitions to a zero carbon future with more energy coming from renewable sources grid modernization and greater reliance on broadband and <unk> technology electrification is a huge piece of this to support the electric vehicle fleet as well as other technology additions to the power load.
In line with this transformation our revenue mix is shifting from almost exclusively conventional energy and civil infrastructure to a large and growing proportion of solar energy electric grid transformation and communications infrastructure.
We've spoken previously about the potential impact of the infrastructure Bill Congress has been working on.
None of that potential has been baked into our current projections.
Now that it has passed in the house whatever opportunities come to our business units from this bill will be pure upside for us we have to see what actual projects materialized, but I can only see positive news in this legislation for per Morris. We are in unprecedented times not just because of the energy transition, but because so much of everything we do has been.
<unk> will be impacted by the global COVID-19 pandemic nearly 21 months ago. After the virus first triggered workplace and social shutdowns, none of us accurately predicted how the pandemic would be affecting workplaces processes and supply chain. Yes, we do know that the short term disruptions in some ways are accelerating the urgency of some of the long term trends.
As such.
Such as grid modernization and the expansion of broadband even as the implementation has been slowed by the pandemic.
As we emerge from this pandemic, we have promotional laid that the underlying demand for our services has not abated.
We are here for the long game and intend to be a leader in contributing to the strength of our communities and our country as we build America's infrastructure in new and more sustainable ways.
And with that I'll now turn it over to Ken.
Thank you Tom and good morning, everyone. Let me begin with our key operating metrics for the third quarter, and then I'll discuss our balance sheet cash flows and backlog.
I'll wrap up with our guidance before moving on to your questions.
Our third quarter revenue was $913 2 million a decrease of only $29 5 million compared to the prior year.
The decrease was primarily driven by a $106 $8 million decrease in pipeline work as expected.
Offsetting by a $41 4 million increase from the utility segment, and a $35 $9 million increase from the energy and renewable segment.
Despite the decline in revenue gross profit for the third quarter was $127 4 million, an increase of $3 8 million.
The increase in gross profit was primarily due to the acquisition of future and good project Closeouts for the pipeline segment.
Gross margins increased to 14% for the third quarter compared to 13, 1% for the prior year.
Now, let's look at each segment.
Energy and renewables revenue was up by $35 9 million compared to the prior year on the continued strength of our renewables work.
Which increased by over $50 million compared to the prior year.
Gross profit was $35 9 million, an increase of $8 4 million or 37% compared to the prior year.
This is primarily due to higher revenues and margins.
Gross margins increased to 10, 2% during the quarter compared to eight 7% in the prior year. This was mainly due to higher costs associated with the LNG plant project in northeast in 2020.
Despite the lower revenue in our pipeline segment, we generated gross profit of $27 $8 million, which was slightly below the $28 million, we made in the prior year.
Gross margins came in at 25, 8% for the quarter.
This was primarily due to some favorable project closeouts during the quarter.
While it's nice to finish strong on these projects I expect fourth quarter pipeline margins to be back to a normal range of 9% to 13%.
The utility segment revenue was up $41 4 million in the quarter with future contributing $65 1 million offset by slightly lower revenue from our legacy operations.
Many parts of our utility segments, including future faced headwinds from both projects and material delays related to COVID-19.
In our electric operations in Texas were impacted by the ERCOT moratorium for most of the quarter.
These temporary issues resulted in lower revenue idle equipment and lower crew utilization.
Despite these headwinds we generated 14% gross margins during the quarter.
Compared to 16, 5% in the prior year.
I'll also remind you that last year's gross margins had the benefit of near record storm work contributed an extra 1% of gross margin.
Taking all this together gross profit was $63 7 million for the quarter down $4 4 million from the prior year future.
Future contributed $11 4 million of gross profit with gross margins of almost 18% this quarter.
SG&A expense in the third quarter was $61 7 million up from $57 million in the prior year.
The increase was due to $6 5 million of incremental SG&A from the future acquisition, which is less than what we originally expected for the quarter.
As we continue to integrate future, we expect our SG&A as a percent of revenue will continue to be in the mid 6% range for the full year 2021, and once we complete the integration next year's SG&A should be back down in the low 6% range.
Interest expense in the third quarter was $4 $7 million.
This is in line with the prior year.
The consistency in interest expense was due to higher debt balances in the current year driven by the future acquisition offset by lower average interest rates this year.
Our effective tax rate during the third quarter was approximately 27, 5% compared to 29% for the prior year.
We expect our full year effective tax rate to be approximately 27, 5% as we are seeing more of our work coming from states with lower state income tax rates.
Net income was $44 1 million for the quarter slightly better than the $44 million in the prior year <unk>.
Diluted EPS was <unk> 81, compared to 90 cents in the prior year as a result of the dilution from our first quarter equity offering.
As Tom mentioned earlier on the call we have implemented three new non-GAAP metrics to be more comparable to our peer group and to make our results more comparable from quarter to quarter and year to year.
We've added adjusted net income adjusted EPS and adjusted EBITDA.
Let's start by discussing our adjusted EPS. These adjustments include noncash stock based compensation.
<unk> integration and related costs amortization of intangible assets amortization of debt issuance costs.
Unrealized gain or loss on interest rate swap.
And the cumulative income tax impacts of these adjustments.
After making these adjustments our adjusted EPS was <unk> 89 per share for the third quarter compared to <unk> 93 per share in the prior year.
And year to date, our adjusted EPS is $2 <unk> per share compared to $1 69 in the prior year.
Adjusted EBITDA for Q3 was $94 7 million, an increase of 8% compared to $87 9 million for the same period in 2020 and year to date, adjusted EBITDA was $238 million or 25% increase compared to $184 7 million in the prior year.
The EBITDA adjustments include noncash stock based compensation and transaction and integration related costs.
Now, let's move to operating cash flows in the third quarter operating cash flows were $9 3 million and year to date, they were $14 9 million.
The decrease in operating cash flows in 2021 was mainly due to lower deferred revenue. This year as a result of the decline in pipeline work and a $43 million deferral of FICA tax payments under the cares Act in 2020.
In the third quarter, we invested $39 4 million in Capex of which $35 9 million was used for construction equipment.
And year to date, we've invested $102 1 million Capex with $91 7 million invested in construction equipment.
We have increased our spending on equipment. This year in preparation for the growth, we're expecting next year and beyond.
We expect our remaining 2021 capital spending to be in the $10 million to $20 million range with almost all of that spent on construction equipment.
We ended the quarter with $199 million of cash borrowing capacity under our revolver was $155 5 million, providing total available liquidity of $354 5 million at quarter end.
Total debt was $678 6 million and net debt was $479 6 million.
Over the next 12 months, we expect to use our cash and operating cash flows to support the continued organic growth of our company reduce debt and to pursue acquisitions that complement our growth strategy.
Backlog at the end of the quarter was $2 7 billion down approximately $131 million from the end of Q2 as we burn through some fixed pipeline backlog and saw the timing of certain new awards temporarily delayed into the fourth quarter.
Our MSA backlog remained flat at $1 5 billion at the end of the quarter, which was a record 53% of total backlog and concluding with our 2021 earnings guidance as a result of the temporary headwinds we've experienced the past couple of quarters. We are adjusting our guidance range and expect earnings per fully diluted share to be in the two.
10 to $2 20 range and we are adding adjusted EPS guidance, our non-GAAP measure, which we expect to be between $2 61, and $2 71 per share.
With that we can turn it over to your questions.
As a reminder to ask a question you will need to press star one on your telephone to withdraw your question westbound key again, if we would like to ask a question Press Star then the number one on your telephone keypad.
First question comes from the line of Sean Eastman from Keybanc capital markets. Your line is open.
Hi team Thanks for taking my question.
Could you just maybe refresh us on what's happening under the Hood and the utilities business. The legacy revenues are down year over year, maybe just understanding what's happening in T&D versus LDC.
In FY.
<unk> revenues I feel like I have come in below expectations.
Through this year, so just a little more color on what the softness is on FIA, specifically as well would be helpful.
Yes.
Yes sure Shaun this.
This is Tom Mccormick.
We've talked about it for the largest part of the year. The revenues are down they're going be down roughly $70 million I'll, let Ken correct me if I Miss speak for the year and it's just Britain were really slow start to their years, but I'll tell you their performance, especially towards the as we approach the end of the year exactly where we expected on their margins are not high double digits.
Next year is there is really a good outlook for next year I think next year is going to be an exceptional year.
Year for them and when we start looking at their revenues and their very back where we thought they would be or should have been.
So if IHS I think is really going to be off to a good start in the beginning of next year. They are going to I think we can finish the year pretty strong gas.
Gas.
Again, one thing you have to think about as we talked about COVID-19 hangover with respect to gas in T&D.
Got off to a little bit of a slow start.
Indeed, there has been a couple of things as I've hurt them all the weather events that we talked about.
In the first quarter and second quarter have slowed both of those businesses down with respect to any work in Texas.
The balance of it has been really just delays by either clients issuing work orders and they probably haven't been issuing work orders disease. They don't have the materials. They havent finished the engineering.
The COVID-19 impacts and a lot of that's very typical with what we've seen in the past when the economy slows down typically construction suffers the next year because clients will pause, which a lot of their clients did at the beginning of this year to wait and see what's going to happen with Covid and what's going to happen with the economy and then they launch off into their year.
I expect our gas group gas distribution group to have a good year next year I think they're going to finish the year strong there's a lot of that depends on the weather because some of their work up in the central part of the U S. In the north is impacted by the weather as Theyre still working right now typically on a on an average year their work through the.
At the end of November, but they'll start slowing down in December.
Good years, they get to work all the way through the end of the year.
We'll just see how that works transmission and distribution there has been a little bit of pressure with respect to wage battle for overhead crews. We've just seen some increases there. So we're doing a lot of competition for the labor, but when you get down into Substations in the distribution work. They do there is actually performing very well and.
I think there was a slowdown in some of the projects, especially during the New York.
Work stoppage that happened this summer and of course they lost they also lost two weeks into the first quarter two weeks in the second quarter, but when you talk about the ERCOT moratorium. This summer they loss project work. So that's been that's really what's impacted them. This year and on top of that you consider the fact that last year, we had a record year with respect to storm restoration.
Work and this year has been very minimal at best.
We don't make a lot of that into our plans, but we do have some of it in our plans and it's actually below plan. This year, we're not going to put much of it in our plan next year and they will just be an upside, but we're expecting a lot of project work next year some of our major clients in transmission and distribution. They are doubling their basically increasing their spend 50% and we expect our budgets to go up with there so.
I think 'twenty two is going to be a great year for them.
Okay helpful Rundown, there and then moving over to the pipe segment.
It sounds like there is some some green shoots on the traditional side and of course on the energy transition side, but as we think about the next 12 months do you think revenues sort of settle here at this run rate in the third quarter or is there more downside on the top line.
At this level of revenue.
What kind of margin profile should we be thinking about I mean, the 9% to 13% target ranges.
Is really wide right. So just kind of curious in that spectrum.
How we should think about the business at this kind of run rate.
Sure. So I'll hit on their workload and what we think the revenues are going to be and I'll, let Ken hit on that on the margins, but I would expect their margins to be very similar to where they were this year that can be somewhere in the $4 $50 million to $500 million range.
Revenue excuse me revenue.
But when you start.
It's going to be.
Probably that I would expect it's going to be that way through the first half of next year I think.
What happens with carbon capture is going to determine what happens at the back end of the year and there are we are seeing a lot. Some work activity or we are bidding. Some projects. We are working with clients on some estimates for carbon capture projects you heard me mentioned.
On the earnings call or the one project that is roughly $350 million to $400 million just on facilities work alone.
I'm not mistaken I think that pipeline work is close to 2000 miles of pipeline and gathering and collection and transmission of that carbon carbon dioxide somewhere so if that project goes or if other projects like it go into the back half of the year could be very good but we're looking at $4 50 to 500, and that's where I would set an expectation in the margins yet even though into 13.
<unk> is a little bit wide, that's just indicative of where we are in those jobs right and so if we're early on in the jobs, where you might be on the lower end of the range and the timing of certain jobs, but if were toward the end and we're closing it out we could be towards the towards the upper end of the range.
I think the sweet spot is going to be right in the middle of it is going to be kind of 10% to 12%.
Okay very helpful.
The Capex guidance came down a lot.
Does that impact your ability to grow in any of these segments next year.
I mean more broadly how should we think about capex on a go forward with pipeline now representing.
The lower portion of the mix does that take down the capital intensity in the business.
Yes.
So I'll answer your second question first no because there is still a pretty significant capex requirement for utility crews and even for some solar work as well, but with respect to capex actually.
While the the guidance came down for Q4 for full year, we're actually going to be above what we originally said and thats, because we had a pretty big spend for Q3.
And as I mentioned in my comments part of the reason for that Big spend in Q3 and Tom touched on this as well is getting ahead of their equipment needs for the growth we're expecting next year.
I think we even said at somewhere between $10 million to $20 million in the fourth quarter, maybe even a little bit more than that to make sure that we'd get out in front of these orders because their vehicle equipment suppliers that are saying if you don't get orders in now for 2023 year like 2022, Youre not going to get your equipment. So we're actually investing ahead of ahead to make sure, but given what we need for growth.
Yes.
Okay, I heard that wrong helpful clarification, there alright, alright, thanks, a lot guys I'll turn it over there.
Thanks, Sean Thanks, Sean.
Next question comes from the line of Lee Jagoda CJS Securities. Your line is open.
Yes, good morning, it's Pete Lucas for Lee.
Touched on a lot of this but can you just.
Mentioned again looking at the guidance can you clarify which segments you're seeing the biggest headwinds from the delays and when do you expect for Q4 to be mostly a revenue headwind or margin weakness as a result, looking specifically at Q4.
Looking at Q4, I think I think a lot of the headwinds we've had in the utility space Youre going to start to trail off a little bit.
Pipeline is going to continue to be fairly steady state in Q4, and energy and renewables is going to be fairly steady state in Q4, as well maybe down just slightly due to normal seasonality in Q4, so and most of it is is revenue headwinds that we're talking about right now.
That's helpful. Thanks, and just one more for me can you quantify the positive.
You had in Q3 for the pipeline segment revenue and margin and should we expect any additional true ups in Q4 that are.
That are included in the guidance range.
Yes, I mean.
Margins for pipeline came in at 25, 8% for the quarter gross margins did our normal range is 9% to 13%. So I think I think you can back into anything above 13% will get you to your number and then in Q4, no Q4 is probably going to be fairly steady state with respect to pipeline margins.
Very helpful. Thank you.
Thanks Pete.
Your next question comes from the line of Adam <unk> from Thompson Davis Your line is open.
Hey, good morning, guys.
Hey, Good morning can you can you comment on the Gulf Coast Industrial award that sounded interesting just curious what your scope is on that.
Trying to think of what.
Gulf Coast, you said there was something in the.
In the energy segment.
Take the year end <unk>.
There is a power generation facility that's out on the West Coast, It's $100 million that we were awarded it's basically it's simple cycle power plant that we're designing and building and there is another one that we're bidding or negotiating and it's behind that one I know we've referred to that there was something in the energy segment that was going to take the backlog of $10 7 billion.
Yeah.
Oh Wow, Okay that was that's a heavy civil award.
For our project.
And along the Gulf Coast, and it's that was heavy or sorry, I thought I heard that Hasnt and industrial maybe still falls in our heavy civil falls in our energy and renewable segment remember we've re segment at the beginning of the year.
Okay, but then.
I guess what are you seeing in general in golf Coast Industrial then.
There's a lot of opportunities a lot of them are related to renewables either renewable gas bio fuels. We are seeing some pickup in just the industrial markets with refiners coming out now with some plans and projects for 2022 and going into 2023.
We mentioned a feed study that we're doing on our renewable natural gas project.
Youre not seeing Mega projects, which is good because we don't do mega projects, where subcontractors on those but there seems to be a number of projects that are in that one.
Third 50 down $1 billion range.
So and we're seeing the market lighten a little bit at a loss.
Pressure on companies bidding those last year, when we were in pretty good position on a number of them with some of our traditional clients.
Got it and then can you comment on.
<unk>.
On the solar side, what youre seeing with panels.
Yeah.
It really depends on the type of panels. The clients are utilizing and we were involved in those projects pretty early as we've talked about in the past. It takes six to nine months really to develop a project from the initial bid our initial discussion of project budgets to entering into a full EPC contract and.
Awards, so the clients that are bidding.
Rejects or buying panels from suppliers that have longer leads we're either getting them to buy those panels earlier or we're extending their schedules to show them. What the impacts are most of the clients, we're guiding them and they are buying the panels early to ensure that they have supply. We've had some projects that have seen some delays, but really it is John and Bonnie.
Just small impacts impacted the jamba months, maybe with a certain section of the facility's panels coming in lighter than expected.
Okay.
That's helpful I'll turn it over thank you.
Alright. Thank you thanks Adam.
Next question comes from the line of Jeremy <unk> from Goldman Sachs. Your line is open.
Yes, hi, good morning, everyone can we.
Just talk about the stoller.
And a nice sequential acceleration in revenue.
<unk> can you just talk about what youre seeing in terms of projects ramping up or hitting the sweet spot from a revenue burn standpoint, and can you update us on where you stand on your ability to increase.
The crew count.
Heading into year end thanks.
Yes, we're still working to add crews we've been successful in adding.
Number of them that we need to support the work that we have under contract or in on our schedules right now for the balance of this year and four into 2022.
We'll continue to build crews and pursue work, but we're not going to talk to take on any more work than we can manage and staff, but we're having some success. There obviously it gets a little bit tighter as you continue to build but the opportunities are huge I mean, we've got I can't speak to the revenue that we burn on these projects, but under contract right now we have just under 800.
Million dollars under contract we have another one point.
$1 billion, it's under LNG right now so that will enter into project execution sometime either later this year or in 2022 that will be executed in 'twenty, two and 'twenty three.
We have another $800 million of projects that we're sole sourced on right now that doesn't mean, they're going to move forward I gotta get financial approval, but most of them a number of them will move forward. So the market huge as a 225 billion plus dollar market.
We're going to continue to push our clients in the government continued to push to replace power generation with fossil fuels with renewables.
We're probably going to have to quadruple how many facilities, we build from 15 Gigawatts a year to 60, Gigawatts a year, which is we'll push it put pressure on us and everybody else to grow. So this business youre going to see significant growth next year from this business from where it is where it's going to finish this year and we're going to do you need to grow it.
And is it possible to just put a finer point on that can we grow the crew count by 30% can you just.
Maybe just quantify how.
How quickly you're able to.
Staffing constraints.
I'd say in a year, we can probably grow the crew count anywhere from 25% to 30% a year, which is about two maybe a little bit more.
Cruise full crews a year the business last year I think it will grow.
Will grow close to 50% this year from last year next year, it will probably be half of that.
You're just not going to grow at the same rate every year, because it gets more and more difficult to do that and plus we just don't want to get out over our skis too much. So we're going to grow at a controlled rate.
Okay.
These were there.
Okay and then.
Sorry. Please go ahead.
Please go ahead.
So you did hear me mentioned that our pipeline group now is actually.
Providing some.
So management personnel to pre they're working with pre to help develop there.
There are people so that they can in the interim what theyre not there is not pipeline work. They can build their management teams with pipeline management teams and build their capacity. So there is an opportunity there to we're doing some cross training to see where are the businesses can provide services to our to our renewables group.
Also because look we built substations, we do underground electrical we do transmission lines. So wherever we can.
Actually do work and complement what theyre doing for their clients and add revenue to our back our back end backlog. It's we're looking at.
Okay.
On the pipeline group.
You folks have.
Delivered a steady job of that.
Recurring closeout benefits over the past three quarters can you just talk about what the schedule of project Closeouts in terms of the bank.
They are expected to close in <unk>, and <unk> and whats the magnitude of those closeouts, how does that compare versus.
The magnitude of projects that you folks finished up over the first three quarters just to help us get a sense, whether we might get another upside surprise here.
Do you mind repeating the question.
But out quite a bit.
Sure Brook can you hear me better now.
Yes.
Okay perfect.
I was saying in pipeline you've had three quarters now really outstanding project closeout benefit. So I'm wondering if you can talk about.
For the fourth quarter and the first quarter.
The jet set you back.
To close out and finish up and how does that compare to the number of projects and the size of the projects that you finished up over the first three quarters just to help us get a sense for whether we could see another upside surprise potentially if things go well.
Yes.
Jerry I think quick answer is most of the project close outs that you've seen over the course of the past two to three quarters or really wrapping up some of those big projects that we worked on that we had started last year, which part of what drove last year to be such a big year.
And then the rent that's coming into this year in terms of Q4, and Q1 and I touched on this a little bit earlier with respect to Q4, I don't expect any big project Closeouts and really with respect to Q1 I don't either.
Maybe big.
Big larger projects, we're working on a lot of what we're working on these days is more.
Maintenance upgrades integrity work more field services type work as opposed to big pipeline projects like we've been executing on over the course of the past year to year and a half so I am expecting that.
Part of the reason why we're expecting kind of a more normalized run rate on revenue as well as margins over the course of the next few quarters.
Okay, we will see if we can do better than that thank you.
Yes. Thanks.
Next question comes from the line of Steven Fisher from UBS. Your line is open.
Thanks, Good morning.
In the utility segment.
You guys mentioned youre starting to see some work ramping back up and will be released in the first quarter of 2022 can you just give a little more color. There how much work do you think was deferred from the quarter and what's allowing that work to get back up and rolling again.
Well again, I think Stephen I think some of it is just the clients have started picking up their pace with respect to releasing work was slowed for any number of reasons last year that we've discussed whether it'd be the COVID-19 hangover supply chain or some delays by them and just pausing just to see what the economy was going to do them.
What COVID-19 was going to do and I think that they are back to normal course of business. We have a number of clients that are looking at there are 22 budgets or trying to finish out this year on projects first of all finished.
Complete their spend but next year looking at their budgets and knowing what their spend is going to be trying to ramp up and be prepared to kick off the year on our normal pace, which is be quite different than where they were last year. We also have new work for new clients and new areas.
With future and you heard us reference those two contracts and there are other projects two contracts that we have and not only in future communications Buddy.
<unk>.
In transmission and distribution as well, but those projects will be ramping up towards the end of this year and into next year as well so.
Okay. That's helpful.
And then on the energy front I think you mentioned there are some delays in solar but it doesn't sound like you're too concerned about push outs or delays or rethink some projects.
What gives you the confidence that that's the case given all the inflation that we're seeing.
Is there a way to maybe bucket the prospects you have in solar the ones that.
Though are going to move forward on time, the ones that will possibly move forward on schedule. One of the ones that you think are most likely to be delayed.
I don't think I could bucket them for you I can tell you that.
Our our management team is well aware of what the delays are they are in constant communication with their clients and they are in the supply the suppliers. So they have kind of baked those delivery schedules into their schedule that they have actually extended some project schedules.
To incorporate delays associated with the supply chain. So you've seen we've seen some of these project durations go out longer.
And you've seen that we've seen the cost of.
Materials and equipment go up and we've incorporated that into our estimates, it's probably where that will affect us as our estimates or are margins on renewables projects would be probably closer to traditional which is roughly 111% to 14%, maybe and you probably won't see those big gains at least not with respect to buy down on material.
It was an equipment.
Okay. Thank you very much.
Thanks, Steve.
Thank you.
The next question comes from the line of Julio Romero from Sidoti and company. Your line is open.
Hey, yes, good morning, Tom again.
Hey, good morning.
Hey, So just following up on Steven's question about.
Utility work kind of being released soon I think you mentioned there.
It was.
Covid hangover supply chain delays et cetera, Yes. My question is on the utility side.
Is that work being released that you expect to kind of flow through.
First half of 'twenty two is that related to legacy utilities are more more telecom.
Thank you it's actually it's all of them a lot of its legacy <unk> legacy and added reflecting the fact that we've been using this year too.
And add new contracts.
Add new contracts and expand into new geographic areas and so we expect some of that to start bearing fruit into Q4, and especially into next year.
Yeah.
A little bit of both.
Okay, and it was nice to see futures gross margins tick up sequentially, even with even with revenue being pulled down a bit.
Should we expect to see any leverage on the gross margin line.
Next year is that sales number.
Perhaps up a bit or does that kind of 18% ish gross margin.
Stay steady state and you expect more leverage on the SG&A side.
Yes going into next year, I think it's going to be more leverage on the SG&A side, 18% is really what we've been targeting all year long.
New they could get back to that and sure enough. They did this quarter.
If it depending on the mix of work I could see the margins, possibly getting a little above 18% sometime next year, but again thats, but its really its really dependent on the mix of work, that's where it really is depending on the blend of work they have it there in a really.
Dense urban environments.
The pressure on their margins, where they get out more rule there.
Their margin to grow a little bit again, it's just it's kind of a mixed when you start talking about unit rate work, but that 18% is right, where we expected them to be and now we just need to get the revenue weapons I'll tell you. The 2022 is looking really good not only for them, but for transmission and distribution and gas probably be a little bit flat maybe have some growth in it probably low single digits.
Their margins are good as well.
Got it so really just any benefit to gross margin would be related to mix and not necessarily a ramp up of revenues.
Correct, Yes, I think they are going to see more project work next year or two which would typically gain a gain a little bit on your margins. There when you successfully execute projects.
Understood and just if I could sneak one more in here I think you talked in your prepared remarks about the Osha mandates in year four element plan can you just kind of sum up.
What kind of impact vaccination mandates could have on your business. If if osha does require full vaccination.
Hi.
It's hard to speak to if you don't necessarily know what the requirements are we're doing we're following all the protocols now as far as testing in quarantine and everything else associated with social distancing and it's.
The one thing that Osha hasnt defined yet as if you're outside if you typically work outside our although his mandate is going to apply so if they apply externally than they could have the implications could be.
Fairly large although we've been able to adapt for the most part over the course of the past few years and Havent really there have been impacts, but very modern so I'd like to really see what theyre going to do with respect to people that work out crews that work outside the majority of the time versus office staff. If it's if it's office staff. We can work around it will make it work if it's if it's <unk>.
Crews and we can start getting into well what does that look like and how does it impact our labor agreements how does it impact our contracts that can be a little bit different deal.
Got it thanks very much for taking the questions.
Youre welcome. Thank you.
Next question comes from the line of Matt Sharpe from Morgan Stanley. Your line is open.
Tom Ken Brooks good morning.
China.
I just wanted to hit on margins here for a second.
Specific.
<unk> sort of the SG&A cost component beyond this year I think your outlook suggests.
SG&A, all ticked down a little bit into 2022 is FIA H integration rolls off.
Looking at the current year, if I back out if IH seems to point to about high 5% range. Similar to 2020 is there any reason going into next year that you can't sort.
Sort of beat that level or any other building blocks other than F. I H that we need to think about here.
No nothing really Matt, it's really just about continuing to.
Finished the integration of future getting their G&A percentage in line with the rest of the company and then just leveraging our our revenue growth. We're expecting next year kind of returning to normal without to hit some of the headwinds we saw this year.
Got it helpful. And then maybe just circling back to the Capex.
It looks like you guys raised it about 25 now at the mid point I know you noted that there was some acceleration of orders here, maybe just how much of the increase was that acceleration and then given that acceleration should we expect that 22 comes down potentially sub <unk>.
3% or what can you tell us about the trend going forward now.
The acceleration is baked into your guide.
Yes that 25 million that you just talked about is really exactly yet that's the that's the addition that we added.
To kind of get ahead and ready for next year.
And then with respect to next year, we haven't finished our capex plans for next year or so.
Lacking any better information I would say next year is probably going to kind of ballpark, where we originally forecasted this year until I have more information.
Yes.
In addition to that we're always going to spend money for growth. So we will have a plan, but there is opportunities for growth, we're going to spend the money, but I agree with Ken I think it could be more in line with what we forecasted for this year.
Got it thanks, gentlemen, very helpful I'll get back in the queue.
Thanks, Matt Thanks, Matt.
Again, if this would like to ask a question press Star then the number one on your telephone keypad.
There are no further questions at this time I would like to turn the conference back to Tom Mccormick Chief Executive Officer.
Thank you Sarah.
I want to thank you for joining us today and close by going back to what I've said at the beginning of this call.
Our results are clear evidence of the strength of our overall business and the strategic value of the acquisitions. We've made in recent years, we are well positioned today in the key markets to support our customers and moving towards zero carbon future.
I want to extend my gratitude to our Morris employees, whose skills and hard work formed the backbone of our success. Thank you.
This concludes today's conference call. Thank you for participating you may now disconnect.
Goodbye.
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