Q2 2022 Primoris Services Corp Earnings Call
Hello, My name is Lisa and I will be your conference operator today at this time I would like to welcome everyone to the Prime more services Corporation second 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.
I'd like to ask a question. During this time simply press Star then the number one on your telephone keypad.
If you would like to withdraw your question Press Star one again.
Thank you I would now like to turn the call over to Mr. Jeremy Apple. Please go ahead Sir.
Good morning, and welcome to <unk> second quarter 2022 earnings Conference call. Joining me today are Tom Mccormick, President and Chief Executive Officer, and Ken Dodgen, Chief Financial Officer before.
Before we begin I would like to make everyone aware of certain language contained in our safe Harbor statements.
<unk> cautions you 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 SEC.
Our forward looking statements represent our outlook only as of today and we disclaim any obligation to update these statements except as maybe required by law. In addition, during this conference call. We will be 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 web.
Right.
I would now like to turn the call over to Tom Mccormick Com.
Thank you Jeremy.
Good morning, and thank you all for joining us today to discuss our 2022 second quarter results along with our updated financial outlook for the year.
I am pleased to report that we generated $1.02 billion in the quarter. This was the highest revenue quarter for more history.
We expect this to be the first of many billion dollar plus revenue quarters as we continue to progress our strategic objectives.
Our performance. This quarter was led by continued strength in our growth markets utilities and energy renewables was entirely offset revenue declines in our pipeline segment.
Over 94% of our revenue during the quarter was driven by the utilities and energy renewable segments.
We increased backlog for the fourth consecutive quarter, an increase of nearly 60% above the prior year period, highlighting our accelerated expansion into higher margin growth markets.
In addition, our acquisition of <unk>, which we announced at the end of the quarter marked a key milestone in our strategy, helping us enhance both the size and scale of our operations in both power delivery and gas utilities, while advancing our shift towards recurring MSA revenues.
We faced some challenges during the quarter stemming from increased fuel and labor prices in our utility segment as well as continued low revenue and margins in our pipeline services segment, which pressured margins for the quarter.
However, our teams have done a tremendous job of working closely with our customers to negotiate increases to our MSA rights in order to mitigate the impact of inflation moving forward.
Now, let's look at our operations by segment beginning with utilities.
Our utility segment revenue came in at $476 $1 million.
12% increase over the prior year period.
We are continuing to drive sustainable growth within both our power delivery and communication businesses as we see higher levels of activity from customers, bringing in $510 million of new business during the quarter.
Backlog in this segment grew by $155 million versus the prior year, creating substantial new revenue opportunities as new management teams in cruise recent acquisitions are integrated and work has stabilized.
And the second were impacted by the inflationary factors I mentioned earlier.
Increased labor costs as well as rising fuel prices have weighed on our results since our utility segment has the largest fleet of vehicles and equipment.
As previously noted to offset these challenges we have been successful in negotiating rate increases over 40% of our clients.
Clearly the majority of our larger clients and expect to see the benefit of the new rates in the back half of 2022 and moving forward into 2023.
As we have continued to expand into new markets and grow our client base. We have realized some increased start up cost the plan on delivering margin expansion from these new business opportunities in the coming quarters.
It's also worth noting the gas distributions at a late start to the revenue burn in Q2 due to prolonged winter weather conditions in the central States, therefore, pushing supply and revenue into the second half of the year.
However, we are confident that this revenue will be realized by the end of 2022.
The indications performed well during the quarter with solid organic growth as we've continued to drive expansion with new customers across new geographic markets.
Communications continue to a significant portion of our backlog growth.
Mix of several small contracts as well as several larger awards with major customers.
We made significant strides on the power delivery side during Q2, which will effectively double with the addition of <unk>.
<unk> is a great strategic fit for <unk>.
This acquisition will help us take advantage of long term tailwind as the U S rapidly transitioned to great independents on electric power generated by both traditional and renewable sources.
Pls foothold in renewable power to grid market.
<unk> strengthens cross selling opportunities with our renewables business.
Giving us more runway to grow our grid connection revenue.
Since the transaction closed at the beginning of the month <unk>.
Integration is underway and we are working closely with the pls teams to maintain business as usual, while we work together to integrate them into for Morris in order to achieve our synergy goals.
Utility signed a multimillion dollar contract for a large fiber network rate during the quarter.
This complex project spans multiple states on the east coast and requires several methods of installation, which we were able to self perform creating substantial value for our clients.
The versatility of our offerings is cheetah more success, providing substantial differentiation that will continue to help us win new business over our competitors.
Overall, we continued to see solid sustainable growth in our utilities segment, driven by the strength in our power delivery and communications businesses.
Our energy renewables revenue came in at $486 3 million up 45% over the prior year, while exceeding our expectations with over $887 million of new projects signed during the second quarter.
The utility scale solar market continues to grow and our focus on diversifying into small scale or distributed generation solar has provided an additional revenue stream and diversification to our renewables business.
Safe and solid execution on this project supports our expansion by allowing us to build repeat business across multiple customers over the long term.
We have line of sight to another approximately $150 million in DG prospects. In addition to work currently underway and we expect to execute on this work during the second half of this year.
These new wins are also helping drive our utility segment is our power delivery teams collaborate with renewables to gain new awards on projects, including battery storage Substations and interconnect among others.
These synergies are critical in enabling us to maintain our competitive advantage in this market the depth of knowledge and strength of our case allows us to quickly adapt to meet the needs of our clients.
IGN continues to be another exciting area of our business.
As a third leg of our renewable energy store hydrogen can be produced at the point of utilization.
As an excellent solution to solve the challenges of energy storage.
We are making progress in development of Green hydrogen alongside a large utility in southern California. They expect to work further with the futility and several others as this market continues to develop.
Overall renewables has been a major growth engine for us, which we are driving forward through a combination of operational expertise and execution.
We have record backlog in the business and it continues to grow.
Our Q2 revenues increased over 90% from the prior year.
At the same time, our operational strength has enabled us to drive margin expansion as we focus on commercial discipline of keeping G&A costs low.
While diligently managing projects to minimize cost and maximize margins.
We have been awarded close to $5 billion of new solar projects. This year and are very confident in the long term outlook for our solar business.
The pending inflation reduction lag.
Should serve as another tailwind nearly $370 billion in energy security funding over the next 10 years.
I'm also pleased excited that Morris was just named as a top 15 solar contractor by solar power wall, where kilowatts installed with over 710000 kilowatts installed in the U S last year.
This accolade, which we've worked to achieve while maintaining solid profitability as a major testament to our leadership in this space.
We expect to only accelerate our momentum going forward as we further build out our renewable footprint.
As of the second quarter 2022, our project backlog for utility scale solar projects totaled $1 3 billion.
We have minimized risks associated with potential anti dumping countervailing duty tariffs by intentionally diversifying our portfolio of projects to those clients and projects that have more module certainty around them.
As I've noted before we do not purchase solar modules for our projects and therefore do not have risks associated with late delivery of modules for our projects.
If a customer experiences the module delay we work to best serve them by planning and executing in a manner that brings flexibility.
We can continue to progress the project and not impact our primary work.
Module is one of the last components installed, giving us the ability to build out the project and adapt to our customers' needs.
We can then return to the project a lighter data installed <unk> modules.
When this occurs our clients are compensated us for the extra costs associated with this work.
We also work with our customers on a design build basis, and therefore have a high degree of transparency into the materials I purchase and incorporate their delivery to our project schedules.
The energy side of the segment is stabilizing and some of the challenges we faced in prior quarters are now behind us, which were primarily due to market softness and uncertainty.
The landscape is improving and due to rising energy prices legacy energy customers are in strong financial health and are beginning to focus on making further investments in infrastructure.
During the second quarter, we were awarded a $172 million contract from the Texas Department of transportation.
These types of heavy civil projects are consistently contributing to our overall energy renewable segment backlog, which we expect to increase to approximately $2 7 billion by the end of the year.
I'll now move on to pipeline services.
Segment revenue came in at $65 million, which is a 50% decrease compared to the prior year.
Pipeline services made up less than 6% of our total revenue in the second quarter and has declined due to decreasing project volumes in part driven by our approach to pursue fewer pipeline projects and focus on field service and pipeline integrity work.
As we continue to grow our other segments pipeline will become a smaller part of our overall portfolio going forward.
We are seeing some of the lowest volumes in pipeline services in the last decade, but expected to pick up in select markets over the course of the latter half of 2022 and into next year.
Similar to the utilities. We are also build client relationships in new geographic locations and are targeting new business in some emerging markets, including hydrogen and carbon capture.
To manage profitability, we continue to take steps to rightsize G&A costs in this segment to be more in line with our revenue spend.
We brought in $43 million in New awards during the quarter and are continuing to see growing bid activity, which should drive revenue in 2023.
I'll now turn the call over to Ken to give us a detailed review of our numbers.
Yes.
Thanks, Tom and good morning, everyone I'll begin with our key operating metrics for the second quarter, followed by our balance sheet cash flows and backlog as Tom mentioned, our second quarter revenue was a little over $1 billion, a new record for us and an increase of $141 3 million compared to the prior year. This was driven by.
Strength in our growth markets, partially offset by weakness in pipeline services.
Our utilities segment increased $57 million, primarily driven by increased revenues with existing customers in power delivery and in communications.
Energy renewables revenue grew by 151 3 million, primarily due to growth in our renewables business as well as growth in our industrial businesses.
Pipeline revenue decreased by $60 7 million on continued weakness across the entire industry.
Gross profit for the second quarter was $92 1 million a decrease of $20 9 million, primarily driven by lower volumes in our pipeline segment and higher cost in our utility segment, partially offset by higher margins in our energy renewable segment.
Gross margins were 9% for the quarter compared to 12, 8% in the prior year.
Now, let's look at each of the three segments and our utility segment gross profit was $40 4 million and $8 5 million decrease from the prior year due to lower gross margins, partially offset by higher revenues.
Gross margins declined to five to eight 5% compared to 11, 5% in the prior year due to the impact of higher fuel and labor costs during the quarter.
With the rate adjustments that we recently negotiated with many of our customers going into effect in July we expect gross margins for the balance of the year to be back in our normal range of 11% to 13% for the rest of year. We continue to see strong demand from our customers and expect to see our normal seasonal growth into Q3.
Energy and renewables gross profit was $53 1 million for the quarter of $19 $9 million increase from the prior year, primarily due to higher renewables and industrial revenue and margins gross margins came in at 10, 9%, a 1% increase over the prior year, primarily due to continued strong performance from our <unk>.
Solar business and improved performance in our industrial business.
Looking forward, we expect gross profit to sequentially increase with revenue in Q3, and Q4 and gross margins holding steady in the low 10% range as we continue to grow our solar revenue and execute on the significant work in our backlog.
Pipeline segment gross profit decreased by $32 3 million from the prior year due to the sharp decline in revenue, which resulted in under absorption of segment fixed cost.
As a result gross margins were negative two 3% compared to 25% last year, which was due to the substantial completion of four pipeline projects.
For the balance of the year, we expect gross margins to be in the mid single digits on modest sequential revenue growth.
During the quarter, we completed the sale and leaseback transaction of one of our properties in California, recognizing a gain of $40 1 million. This was part of our continued effort to optimize our hard assets, both fleet and facilities in order to improve operations and reduce costs.
We entered into a three year leaseback agreement that will give us time to transition our remaining operations to other more strategic lower cost locations in the area.
SG&A expenses in the second quarter were $59 7 million, an increase of $2 million over the prior year as we continue to invest in technology and human resources initiatives to support our company's growth.
As a percentage of revenue SG&A decreased to five 8% compared to six 6% in the prior year, primarily due to the increased revenue we.
We expect our SG&A to be in the low to mid 6% range for the full year.
Transaction costs were $5 2 million for the quarter, primarily related to our acquisition of <unk>.
Net interest expense in the second quarter was $4 7 million compared to $4 8 million in the prior year essentially flat with a slight decrease was primarily due to higher average debt balances as well as higher average interest rates offset by a $1 7 million favorable impact from the change in fair value of our interest rate swap.
Our effective tax rate was 27% for the quarter and year to date. It is 25% the reduction in our effective tax rate is due to our ability to use a tax capital loss to offset the capital gain on the property sale.
We expect our effective tax rate for the full year to be 25% as well, but this may vary depending on the mix of states in which we work.
Net cash used by operating activities for the six months was $91 1 million. This use of cash was driven by the investment in working capital to support the record revenue.
The investment we continue to make in buying materials for our solar projects and the gain on the property sale, which is a reduction to operating cash flows, but additive to investing cash flows.
In the second quarter, we invested $65 $8 million in Capex of which $36 6 million was for equipment. We expect capital expenditures for the remainder of the year to be $60 million to $70 million, which includes $30 million to $40 million for equipment.
We ended the quarter with $91 3 million of cash borrowing capacity under our revolver was $105 7 million total available liquidity was $197 million and net debt was $613 4 million.
Total backlog at the end of the quarter was a record $4 6 billion, an increase of $547 million for the quarter fixed backlog was $2 8 billion and <unk> $388 million during the quarter, driven by new solar and heavy Civil Awards.
The MSA backlog was almost $1 8 billion, an increase of $159 million during the quarter driven primarily by an expected increase in work from existing customers.
Turning to our full year earnings guidance, we are increasing our full year GAAP EPS guidance to $2 40 to $2 60 per share. This reflects the benefit from the property sale and the improved performance in the energy and renewable segment, partially offset by the lower performance in our pipeline segment.
We are lowering our adjusted EPS guidance to $2 39 to $2 59 per share primarily due to the weakness in pipeline, partially offset by improved performance in energy and renewable segment and by the contribution from <unk>. The addition of <unk> for the last five months of the year should contribute adjusted EPS of approximately <unk> <unk>.
<unk> per share.
With the continued strength of our solar business the rate changes, we negotiated with our utilities customers and the addition of <unk>, we feel very good about the balance of the year and see strong prospects for both our utilities and our energy renewables business underscored by our record backlog and with that I'll turn it back to Tom Thanks, Tim.
Jim.
Looking ahead, we are increasingly focused on the utilities and energy renewables markets and less the loan pipeline construction, which made up less than 6% of our revenues this quarter and will continue to be a smaller part of our overall business going forward.
We have a strong momentum in our growth markets highlighted by nearly $1 $4 billion of new business, we brought in between our utilities and energy renewable segments.
With the updated outlook to Kansas provided we expect the following for the full year.
Our energy renewable segment to grow approximately 40% to 45% compared to last year.
Our utility segment to increase in the range of 15% to 20%.
And our pipeline segment to finish the year below last year between $280 to $300 million.
We have a solid growth trajectory supported by the ongoing strength of our businesses. The work we are both pursuing and capturing is aligned with secular market themes, including next generation broadband infrastructure power delivery and renewable energy.
These all tie together to support the overarching goal of achieving a net zero future.
We are keeping a close eye on government legislation, including the infrastructure and jobs Act, which should drive shovel ready projects for rural broadband and urban <unk> deployments significantly creating growth opportunities with our utilities businesses as well as several of our other businesses.
The transition to renewable energy sources has served as a major tailwind and we are well positioned to capture these growth opportunities as we continue to execute on our strategy.
With the <unk> acquisition, we have added a new range of capabilities to our portfolio, which we will continue to develop and leverage to spur further expansion into the power delivery and gas utilities markets.
With all these factors in mind, we see a bright future headrick Morris and look forward to continuing to drive long term growth for our business.
Thank you again for joining us today I'll now hand, the call over to the operator for Q&A.
Operator.
At this time I would like to remind everyone. If you would like to ask a question. Please press Star then the number one on your telephone keypad.
Your first question comes from the line of Jerry Revich with Goldman Sachs.
Alright.
Yes, hi, good morning, everyone.
I was impressed with your ability to ramp up in the renewables segment can you just talk about a few folks were able to bring additional crews online or what drove the sharp sequential acceleration in revenue burn in the quarter.
Well, Gary we've been growing building crews all along.
I noted earlier, we are also in the distributed generation now so we were able to.
Redeploy I guess some of our pipeline resources and employees over to take on that that new operation with renewables for distributed generation and so that has helped grow that and we have a little over $100 million worth of work there and as I noted we have about another $150 million worth of work that we expect to execute on before the end of the year. So that's part of it.
The other part of it is we're continuing.
<unk> consistently trying to build teams and growing teams and as were doing take out more capacity and that's what we've been able to do in achieving of course theres a theres a huge funnel of work and as I noted in previous calls.
Various renewables projects in different stages, whether it be LNG P or we're bidding or were actually pricing for our clients and negotiating contracts.
We've been able to build on the strength that we have in that group and just continue to be first with winning work.
And for the solar business.
Specifically are you at 70 cruiser you higher than that.
Yes.
We're adding we're interested we're building our seventh and eighth crews right. Now I think we're finished just about finished with our seventh driven we are in our <unk> building our expertise.
And they are in Troy most of these employees are onboard theyre just in training and development.
Super Okay great.
And then can we talk about the utilities segment. So we're pushing pricing now under normal seasonality Youre third quarter margins look pretty similar to the second quarter margins I'm wondering with the price increases that you spoke about in your prepared remarks, how much should we be looking for margins to expand sequentially.
You versus <unk>.
They shouldn't go back to where they traditionally are although there'll be diluted by the when you look at the total year just based on the first and second quarter results, but theyre going to go back some traditional percentages going forward. So we were successful in negotiating them, we werent successful negotiating them to be retroactive so but on a go forward basis. They look very good.
And do just to put a final point on that I think normally in the back half of the year, you folks run about 13% and utilities gross margins. It sounds like we should be thinking about going.
Going back to that level of profitability.
Yes, Jerry in my remarks, I think I said, 11% to 13% in the back half of the year and of course, it will be shaped like it normally is.
Okay.
Super I appreciate the discussion thanks.
Your next question comes from the line of Lee Jagoda with CJS Securities.
Hi, Good morning, it's Pete Lucas for Lee.
I think you touched on it in prepared remarks, but in terms of the guidance.
Can you quantify the expected accretion from <unk> and 'twenty two implied in the range and also.
X X sorry also excluding <unk> would you expect the cadence of total revenue for Q2 to be up down or about the same sequentially.
So the Pls contribution is going to be nine cents at adjusted EPS for the last five months of the year that they're part of us.
And then Pete what was your second question on to make sure I'm clear could you ask that again.
So excluding <unk> would you expect the cadence of total revenue to be up down or about the same sequentially for Q2.
Up.
Okay.
Fantastic.
And then.
To the extent that fuel costs have impacted margins in the utility segment.
Can you quantify that impact in how are discussions going with clients to potentially recoup some of these costs.
While the impact is.
The 3% difference from last year to this year and margins in the utility segment. That's the that's the primary place we've seen we've seen a little bit and the other two segments, but it's really the vast majority of our fleet is in the utility segment, and that's where we've seen the impact.
As Tom mentioned, we've negotiated had significant negotiations with some of our largest customers. There we've had great.
Great response from them those rate changes go into effect July one.
Did go into effect July one and we're expecting the benefit of those rate adjustments for the balance of the year. Yes. One thing I'd add is that that RMB utility segment, probably drives three times the miles of other our other two segments combined in any given quarter. So they had the largest part of our fleet and equipment. They drive the most miles they burn the most.
Fuel.
Yes.
Perfect very helpful. Thank you.
Your next question comes from the line of Steven Fisher with UBS.
Thanks, Good morning.
Had to ask about the pipeline segment and what do you think is going to be different about maybe the revenue mix in the second half of the year I know you said, Ken modest revenue growth over the second quarter level.
You would have a pretty big ramp up in margins on just a modest revenue growth. So what's going to be different about maybe the mix. There that enables you to get to that mid single digit margin there.
Yes. Good question, Steve two things first of all just.
In Q2, we still had that in.
That one job up in West, Virginia that took the loss last quarter. It was burning at zero margin. This quarter. It's done now which is great and glad to have that one behind us. So the revenue that we will have back.
Back half of the year.
Even though up only up only modestly as I mentioned should be burning at more normalized margins are closer to normalized margins, we're still going to have a little bit of the under absorption issue, but we have we have begun as of a couple of months ago and cutting costs in order to minimize that impact and between the two efforts that should get us.
Into that low single digits like we've talked about.
Okay. That's helpful and I think you could clarify but did I hear you say that you have addressed constant in the utility segment at 40% of your customers.
And if that's right and I guess, how should we think about the other 60% and how that sets up for 2023.
The 40% of our customers represented the majority of our largest customers. So that's sort of most of our revenue spend will be.
The balance were still either negotiating with other customers who have informed us that they are not going to be able to make any adjustments until these things are typically they have an annual trigger that triggers.
Adjustments in that they will have to wait I'll notice. So we'll either see those adjustments based on when they come up for the contractor or the MSA terms or we're still negotiating.
Some of them will have success with some we may not.
Okay and then just lastly, if you could just clarify the cadence of EPS.
Adjusted EPS for the second half of the year, because I think you have to average about $1 a quarter.
To hit that midpoint, so I guess I'm, assuming it's more weighted towards the fourth quarter, but just as any other color you can provide there. Thank you.
Yes, it's.
Good question, Steve, it's actually going to be fairly evenly weighted between Q3 and Q4, we think both quarters are going to be right in that in that dollar range.
Okay perfect. Thank you.
Your next question comes from the line of Julio Romero with Sidoti <unk> Company.
Hi, Good morning, a clarification question to start towards the end of your prepared remarks, Tom I think you said the segment sales guidance.
Of energy renewables to grow 40% to 45% and utilities.
1% to 20, and I think thats the reverse of what's on the slide deck. So I don't know if I misheard, you or if you could clarify the segment sales revenue growth target for 'twenty two.
It is it just turn to the slide the slide you're referring to it is incorrect in the slide deck and needs to be corrected energy renewables will grow 40% to 45% utilities will grow 15% to 20%.
Sorry about that we'll get that corrected and repost.
Got it no worries that that clears up a lot of my questions here I guess.
Okay.
The.
The increase in fuel prices and labor costs on the utility side do those rate benefits hit I know you talked about 40% of your clients you have done that successfully to the right benefits hit immediately as of July one or do you have to get through some existing projects backlog before you see that benefit on the P&L.
Although he became effective July one.
Okay.
Okay.
You see that July 2nd on your on your P&L or does that.
Okay. Later, yes, I guess, we see the benefits starting July that day.
Okay, Okay, perfect and then.
Just last one for me is thinking.
Thinking about your.
The solar side are you seeing any impact from the <unk> FTA.
On your customers and are your customers seeing any project schedule is getting pushed out and how does that affect the variability of your billings in the back half.
We've had some projects that have seen some delays in delivery of modules, but not in not all of the modules in their entirety. So.
Again, we were able to on a just a job you say all the modules.
Going to be delivered late we can still execute 90% of the work and then come back later install the modules. So it doesn't really have a big impact there are some projects, where we're at we're going to have to send crews back but for the most part the majority of the work is already complete.
Got it thanks very much taking the questions.
Your next question comes from the line of Sean Eastman with Keybanc capital market.
Hey, guys. Thanks for taking my question.
I just wanted to come back to the utilities segment margins.
And the Investor materials, you guys highlight both fuel and wage inflation in terms of.
Contributing to a drag on margins I think in the Q&A here, Ken you suggested that.
The year on year decline was was pretty much all fuel. So I just wanted to clarify that because.
Yes that is obviously quite important as we think about the go forward expectations.
Yes. Good question, Sean So let me clarify that it is both fuel and labor inflation. So.
I think that's an important point right because fuel inflation, we've seen across the board across all of our markets nature.
A nationwide.
And Thats, probably I don't have the numbers in front of me right now, but that's probably about a third of the impact to the other two thirds is labor, which is more specific to certain markets. We haven't seen it across the board labor inflation, we've only seen it and a few critical markets and so that also dovetails in with the 40% right the 40% of the cusp.
So we negotiated with has been focused on a combination of labor and fuel and in particular those markets, where we've actually seen labor inflation and we've got an adjustments to both where my guy adjustments.
Sure.
Yes.
Okay.
That makes total sense and.
Do you guys feel that you have enough of a cushion or handle around this dynamic within what you have embedded in the guidance for the Pls business.
Yes, we feel really good we have spent a significant amount of time, both between announcement and closing and even since we closed about a week and half ago working with them closely.
Understanding continuing to understand the depths of their contracts their business their relationship with the customers and what they expect the back half of the year. So.
We feel very good about the numbers that we've put in here.
Okay got it and then just staying on the on the labor inflation side.
I think our fuel drag was to be expected, we had a big spike there.
Pretty straightforward.
On the labor side.
I feel that.
I have thought you guys would have a pretty firm hand or coming into the year on what wage inflation was going to look like and what it's going to cost to deploy labor resources in a particular region.
So how would you frame.
What's kind of caught you off guard here in the first half from that perspective.
Maybe just in terms of what's happening boots on the ground in some of these higher.
Wage inflation regions.
Yes.
I think the biggest factor is when you start to get into.
Power delivery and Youre talking about alignment journeyman that is where we've seen the biggest increase in wages look it's a very limited resource takes a number of years to develop that skill set internally and for them to develop it even going to the specific schools, where theyre trained so.
We've seen and I think everybody was probably surprised although we've seen it go up and how dramatically it has gone up over the past.
A couple of quarters.
So it's just a very high demand labor market with very limited limited resources, So youre going to have to pay the higher wages to be able to get those resources and get them to stay.
Okay got it and then just one last quick one from me just on the same topic as we look at this huge backlog growth in the energy renewable segment.
Sure.
Do you guys feel good about the labor resources, you already have in terms of being able to execute on that.
Incremental backlog.
Is there any risk we see this heavy wage inflation bleed into into that part of the business as well as <unk>.
Kind of continue to accelerate.
We can do labor surveys in every market that we estimate a project in our renewables business. So we kind of know what the way to what the what the wage rates are in those areas and then we put contingencies on those four four and four for inflation those jobs out of a very specific start and end dates. So they have a very short life cycles. So if we miss them.
Little bit, it's not going to hurt us a lot. It's also easier to train those skill sets than it is a lineman journeymen or someone using fiber.
Okay very helpful. Thanks for hanging in with me here guys I appreciate it.
Your next question comes from the line of Adam Thalheimer with Thompson Davis.
Hey, good morning, guys.
I guess this is more of a <unk> question, but do you do you expect your utilities fixed backlog to increase.
When you add them I'm just thinking about.
How much they are bidding on individual transmission projects and things like that.
The vast majority of their work is under Msas, just like ours. So it will be almost all especially in the utility segment almost all MSA backlog increase.
Okay, and then I guess, a quick question on the sale leaseback in terms of.
Why now with the ongoing savings could be and is there more you can do on that front.
There's a little bit more why now it just it was just purely opportunistic opportunity came along in the southern California market literally.
Literally I don't.
I'll speak honestly here, we were not actively planning to sell this.
We add.
Unsolicited inbound calls coming in and we had so many that we felt like it was worth looking at.
We had no idea that we were sitting on a piece of property that was potentially worth that much. So it was it was a great windfall. It was a great strategic decision for us.
I don't have the quantification of the cost reduction on a go forward basis, I think that's going to that.
It can be worked out over the course of the coming quarters as we really solidify the new locations that we're going to be moving into that we've already identified I. Just don't have those numbers in front of me look we have assets everywhere that we evaluate and look at do we need it. If we don't can we move it is the right market to move it in.
Same thing with when we do the same thing so we're constantly reviewing that and evaluating what the need is and trying to long term is there a need or is it can we consolidate and there is a benefit of doing that.
Okay, and lastly, I guess I'm, just kind of reading between the lines, but it feels like futures performing pretty well for you guys. This year.
They are they are they are doing exactly what we thought they would do when we bought them.
Got it thanks.
Your next question comes from the line of Brent Thielman with D. A Davidson.
Hey, great. Thanks.
Is there a way to break out the backlog in energy between sort of renewable solar civil and then.
Everything else.
Yes.
Yes, I don't know that I have those numbers in front of me.
I thought it was in the presentation.
Yes, I am sorry, if I don't have it in front of me right now, but I think we were still kind of just north of $1 billion in backlog just for the renewables piece of that segment as of the end of the quarter.
Okay.
And is it your guys expectation.
Solar could grow more than 30% this year.
Yes.
Absolutely.
Yes.
And then on the pipeline side I mean, it sounds like you are taking.
Yes, some action and cost out.
You talked about kind of more of an emphasis on the integrity side are you. I mean are you structurally sort of re sizing. This business. We still have all the capabilities you add before I was just curious about your comments around that.
We still have the capability to construct pipelines Interstate pipelines, we may not have the capacity to do as many spreads as we once used to be just because there is no need to carry that much.
<unk>.
Fixed overhead fixed cost we still have the same management team, we still have some same key field personnel.
We're just utilizing some of them in other areas right now to tell but keep those costs down to mitigate those costs others. We've let go and we will continue to evaluate whether we need to do that or not we are seeing some bid activity, which is pretty promising although it will be for work that happens in 2023.
Okay.
Yes, Okay and then.
I would also comment that your comment.
Around your ability to leverage the renewables awards within the utility segment.
How far does that reach is that require a big investment in.
And a new resources equipment and utility since was curious and elaborate on what you're seeing there.
We already have the skill sets, we already have the equipment in the tools <unk> helps.
Helps augment that I mean is this.
Substations is connections to the grid.
Anything associated with that but there was a.
Service that we offer to our clients previously but the.
The addition of <unk> expands our capabilities.
And is that allowing you to win more work.
To some of the competition at that time I guess, that's what I was just curious.
I mean, I would say, it's really hard to say, but I think we're seeing more and more clients like us like the fact that we can do everything we can design one of their facilities. We can build it all the way out to tying into the grid and they like having.
One throat to choke I guess is maybe the wrong way to put it but thats one contractor responsible for all the work.
Yes.
Alright I appreciate it thank you.
Okay.
At this time there are no further questions I would like to turn the call back over to Mr. Tom Mccormick for closing remarks.
Thank you operator.
We appreciate your questions today and thank you for your investment in <unk> <unk>.
I'll close this call by reiterating the key takeaways from the second quarter.
We continue to accelerate our focus on utilities and energy renewables highlighted by the acquisition of DLH, while focusing less on pipeline.
Our growing backlog represents the strength of our business and the size of the opportunities that lay ahead of us and our growth strategy is centered around capturing long term secular trends, which will both expand for Morris will helping advance our society as a whole.
I want to thank all of our employees for working safely and efficiently everyday we cannot do the things that we do without their commitment and hard work.
Thank you again, everyone and have a great day.
This concludes today's conference you may now disconnect.
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Yes.
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Thank you.