Q3 2022 Primoris Services Corp Earnings Call
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Thank you for standing by at this time I would like to welcome everyone to the Prime mortgage services Corporation third quarter 2022 earnings conference call and webcast. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. If you would like to add.
Good question. During this time simply press star followed by the number one on your telephone keypad. If you would like to withdraw your question again Press Star one. Thank you Blake Holcomb Vice President Investor Relations you May begin your conference.
Good morning.
Welcome to the <unk> third quarter 2022 earnings conference call.
As we begin I would like to make everyone aware of certain language contained in our safe Harbor statement.
Actual results may differ materially from our projections and expectations.
These risks and uncertainties are discussed in our reports filed with the SEC.
Our forward looking statements represent our outlook only as of today.
We disclaim any obligation to update these statements except as required by law.
In addition, during this conference call, we will make reference to certain non-GAAP financial measures.
A reconciliation of these non-GAAP financial measures are available on the investors section of our website and our third quarter 2022 earnings press release, which was issued yesterday afternoon.
I would like to now turn the call over to Tom Mccourt.
Thank you Blake.
Good morning, and thank you for joining us today to discuss our third quarter results and our business outlook for the remainder of 2022 and going into 2023.
The third quarter results for for more showed solid execution and the overall strength of our market position as we set new records for both revenue and backlog.
The strong quarter was the fundamental driver of progress in our 2022 year to date results.
Revenue year to date is up over 18% for 2021 and organic revenue growth is up approximately 12%.
This is impressive growth given the significant headwinds we are facing this year our pipeline services segment.
Despite some continued headwinds for both the pipeline segment and inflation across the board.
Gross profit was up almost 22% from the third quarter of last year and up 68% from the second quarter 2022, as we benefited from higher revenues and rate increases that we negotiated with a number of our key clients to ease some of the inflationary pressures.
Similarly, our backlog has roughly doubled from the third quarter of last year to $5 $5 billion.
Of which nearly 80% as organic growth from our utilities and energy renewables segments.
We have also achieved the highest level of backlog and our pipeline services segment since the second quarter of 2020.
We recently announced another $400 million of awarded projects in our energy renewables segment across our solar power in the heavy civil businesses that are not reflected in these totals we.
We'll begin working on a number of these projects during the fourth quarter and expect that our backlog will continue to gain momentum as we close out the year to position us for a strong 2023.
With that I'll provide some commentary on each of our segments.
Beginning with utilities, we delivered margin recovery in the third quarter, despite the labor and if fuel inflationary impacts that continue to have some impact this quarter.
Revenues also increased both sequentially and year over year as we continue to grow our communications business across our utility footprint.
We also saw strength in our gas and electric businesses in our West region and realize additional contribution from the <unk> acquisition that closed on August one.
Most of you are familiar with pls from our past several updates, but let me reiterate a few of the reasons. We are excited about them, becoming part of the Morris family of companies.
First it aligns with our strategic focus on higher growth higher margin markets, including power delivery communications and gas utilities.
Second it adds new customers with MSA contracts, while bolstering our footprint in new and existing areas that are some of the fastest growing in North America.
And perhaps most importantly.
At 1300 skilled crafts persons through our combined workforce to better serve our clients.
We witness the benefits of this increased labor force during the response to the aftermath of Hurricane Ian.
For Morris was able to sell approximately 700 employees to help restore power deliveries to our neighbors in the regions affected by the storm.
For perspective, this was more than double the number of crude workers, we deployed to assist with Hurricanes Nicolas in Idaho in 2021.
While the number of stores through the third quarter this year were lower than normal.
Ian hit areas of the southeast, particularly hard and we were glad to be able to assist in getting power delivery back up and operating in those communities.
Integrating <unk> and maximizing its potential and our organization will take some time and there will likely be some bumps in the road along the way, but we are confident in our ability to maximize our return on this investment in the years ahead.
In our communications business, we've moved past some early growing pains and pandemic related delays to generate a great third quarter as both revenues and margins grew at least 50% from the third quarter last year.
The acquisition of Beacon has been a nice addition to our growing communications division that has significant tailwind in the coming years from the increases in anticipated broadband spending.
We are also capitalizing on our ability to bring these services to customers in areas that we already have a relationship with on the electric utility side, which has helped grow revenues and margins over 27% year to date from the same period in 2021.
While we expect to see continued topline growth utilities heading into Q4, some inflationary pressures and supply chain constraints persists.
We remain proactive in positioning ourselves to best manage our labor costs and are working with those customers that have upcoming MSA renewal discussions to address these higher inflationary costs.
We are having transparent discussions with some customers in certain regions that have been less profitable are reluctant to work with us on rates.
And some of these cases, we are opting to forgo further work with these clients and instead, we'll shift our personnel and equipment resources towards strengthening relationships with customers that view us as a valuable service provider.
Looking next at our energy renewable segment organic revenue was up over 50% and gross margins more than double during the third quarter compared to Q3 2021.
Through the third quarter of 2022 organic growth is up 34% and gross margins up almost 50% compared to the same period of 2021.
This substantial growth came primarily from our industrial and utility scale solar businesses.
On the industrial side, we've seen a rebound in revenue and margins coming from a nice backlog of projects on the west and Gulf Coast.
We also moved past some projects that had been a consistent overhang on profitability in previous quarters and promoted some new leaders over certain businesses that are now yielding results on improved execution.
The prospects for a healthy funnel to add to our backlog are very favorable as has the potential for internal synergies between businesses as it relates to large utility scale solar.
Renewable fuels and green hydrogen.
Looking further at solar we continue to excel as one of the top solar project design and construction companies in North America, being highly capable and both utility scale and distributed generation projects.
Revenue and gross margins of approximately doubled from the third quarter of last year and are up over 70% year to date compared to the first nine months of 2021.
Our success in solar is one of the most underappreciated parts of the more story and we continue to exceed even our own expectations.
We've worked hard to develop the right teams and be selective in working with the right client that allows for efficient and highly productive repeat business.
We expect to have over one 3 billion and backlog as we close this year, which is a 30% increase from the end of 2021 and will keep us working through 2023 and beyond.
The low availability of modules has caused delays in getting some of our clients projects completed and online.
However, we've been able to keep our teams utilized by completing the projects to the point of module installation moving onto the next project and then returning with a smaller contingent of craft persons to complete the project once the modules arrive.
We continue to train and develop new project teams to learn and adopt our standard practices, which have added a great deal of value to our customers fixed price projects and have minimized our risks and constructing them.
Many of our clients are of the opinion to the supply of module should come back by mid 2023.
And others are making investments in building facilities produce their own modules and rely less on 4% to third party suppliers.
In addition to building more project teams to meet the growing demand in solar we have also been staying ahead of potential cost inflation, where supply chain challenges by your stocking or obtaining firm commitments from key suppliers for critical items that we provided solar construction.
This will help ensure that when our customers are rates move forward, we will be ready to move forward with them.
We have also started manufacturing certain components in house that will lower our cost and serve as a revenue stream in the form of sales of our of excess supply.
The passage of the inflation reduction act or IRI in August only magnifies the opportunity in solar.
Our customers are still evaluating this legislation, but there is a lot of enthusiasm that we will see <unk> into the market for the next 10 to 12 years.
As our customers navigate through the bill to maximize their benefit. We are also analyzing how we may benefit from the incentives are aligned to the bill.
For example, we are well positioned to take advantage of incentives for contractors with apprenticeship programs that allow our employees to develop their craft and skills.
Competency that new entrants may not possess.
We are also optimistic that DRA will open additional avenues for our energy renewable segments grow beyond solar.
This includes opportunities in green hydrogen and when that could also benefit greatly from the incentives and the bill.
Wrapping up the segments with pipeline services, despite revenue uplift related to <unk>. It was another quarter of challenges for our profitability.
The segment has fallen below our performance expectations for 2022.
We are moving past some problem projects and are working toward a renovated segment focused on profitability and cash flow.
We recently introduced new leadership overseeing this segment and are already beginning to see results of staying focused on project execution and discipline.
We are also seeing bid activity begin to improve particularly in the Gulf Coast region on projects that will connect producers to nearby processing and LNG export markets.
This includes the large award we announced in September which kicked off last month.
The integration of Pls pipeline, while only 10% of our pipeline services business as added complementary clients regions and service offerings to the segment, particularly.
Particularly it build services, where we think that we have a lot of opportunity to grow our integrity maintenance small capital project work with improved profitability.
During this time of federal permitting challenges repair rework and maintenance of existing infrastructure will be necessary to keep the flow of energy moving.
We also see opportunities to participate in markets outside of traditional oil and gas to midstream projects that will move carbon dioxide hydrogen to the other liquids.
These projects will require investment in new infrastructure and in some cases span hundreds of miles.
We believe we are well positioned to capitalize on these projects given our expertise and mix of Union and nonunion craft labor.
Overall, why pipeline services remains a smaller piece of our business.
We are confident that focusing on project selection of performance going forward, we will see solid contribution to our bottom line from this segment in future quarters.
Across all of our segments Morris is investing in the people and equipment necessary to meet the growing infrastructure needs in North America.
We have made strategic acquisitions that have expanded our service offerings customer base and geographic footprint.
While continuing to grow organically with longstanding customers and new markets.
I'll now turn it over to Ken to talk about our financial performance for the quarter.
Ken.
Thanks, Tom and good morning, everyone I'll begin with our key operating metrics for the quarter, followed by our balance sheet cash flows and backlog and I'll end with our guidance as Tom mentioned, our third quarter revenue was a record for <unk>, reaching approximately one 3 billion a new record for the second consecutive quarter and an increase of 371 million.
Dollars or 41% compared to the prior year, and an increase of $261 million or 26% from the second quarter of 2022.
This was driven by continued strength in our growth markets, including solar communications and power delivery, partially offset by weakness in pipeline services.
Our utilities segment increased $158 million or 34, 8%, primarily driven by increased revenues with existing customers and power delivery contributions from new <unk> customers and expansion of our communications business.
Energy renewables revenue grew by $249 million or <unk> 71, 1%, primarily due to solar revenue that increased almost 100% and healthy growth in our industrials business.
Pipeline services revenue decreased by $37 million from last year due to continued challenges in the midstream sector that has led to fewer projects moving forward and are being more selective in the customers, we work with and the projects we bid.
Gross profit for the third quarter was almost $155 million, an increase of $27 million from the prior year driven primarily by strong contributions from solar improved industrials profitability and the addition of <unk>, partially offset by the decline in pipeline.
Gross profit as a percentage of revenue was 12, 1% for the quarter compared to 14% in the prior year. This was primarily due to challenges in the pipeline segment and slightly lower utility margins, partially offset by better energy renewables margins.
Now, let's look at each of the three segments.
In our utility segment gross profit was $78 million or $14 3 million increase from the prior year due to higher revenues in power delivery and communications and $10 million from the become NPL acquisitions.
Gross margins declined to 12, 7% compared to 14% in the prior year due to the inflationary impacts of higher fuel and labor costs during 2022.
A significant improvement from the second quarter due to the rate adjustments renegotiated.
We are continuing to work with our remaining customers to negotiate rate adjustments that should go into effect over the next few quarters, but their impact will be much less than what we've seen in Q3.
Looking at Q4, we expect to see our normal seasonal decline in gross margins to the 9% to 11% range depending on weather.
Energy and renewable gross profit was $80 1 million for the quarter, a $44 2 million increase from the prior year, primarily due to higher renewables and industrial revenue and margins gross margins also increased over 300 basis points to 13, 3%, primarily due to some project closeout and our <unk>.
<unk> business is.
Significant improvement in the execution of projects in our industrials business looking at Q4, we expect gross margins to trend toward the normal 10% to 12% range.
Pipeline segment gross profit decreased by $31 1 million from the prior year due to the decline in revenues, which continued to drive under absorption of segment fixed cost as a result gross margins were negative four 6% compared to 25, 8% in the prior year, which benefited from the closeout of multiple pipeline projects.
Looking to Q4, we expect to see gross margins in the low to mid single digits as we begin executing new work and make progress towards reducing our segment fixed overhead costs.
SG&A expenses in the third quarter were $75 7 million, an increase of $14 million over the prior year due to additional support costs, we assumed through our acquisitions how's.
However, as a percentage of revenue SG&A decreased to five 9% compared to six 8% in the prior year, primarily due to our revenue growth. We expect our SG&A will continue to remain in the low 6% range for the full year.
Transaction and integration costs were $12 7 million for the quarter, primarily related to the acquisition of DLH.
Net interest expense in the third quarter was $13 1 million compared to $4 7 million in the prior year. The increase was primarily due to higher average debt balances from the completion of the <unk> acquisition as.
As well as higher average interest rates.
Our effective tax rate was 18, 6% for the quarter and year to date. It is 19, 6%.
The reduction in our effective tax rate is driven by the use of capital losses to offset capital gains on real estate and a change in the mix of states in which we work.
We expect our effective tax rate for the full year to be 19, 6% as well, but this may vary depending on the mix of states in which we work.
Net cash used in operating activities for the first nine months of the year was $102 million, an increase of only $10 9 million in Q3.
This use of cash was driven by the investment in working capital to support our revenue growth. The investments we continue to make in buying materials for our solar projects, which is roughly $80 million year to date.
We offset by a reduction in dsos from improved collections and improved terms with vendors and suppliers.
In the third quarter, we invested $9 $9 million in Capex, and we expect to spend $20 million to $30 million in Q4 of which $15 million to $25 million will be for equipment.
We ended the quarter with $111 9 million of cash.
Borrowing capacity under our amended revolving credit facility was $126 6 million and total available liquidity was $238 5 million and.
And net debt increased to $1 1 billion at the end of the third quarter. Following the close of the <unk> acquisition.
Looking at backlog total backlog at the end of the quarter was a record $5 5 billion, an increase of $900 million from the second quarter and nearly double year over year.
Fixed backlog was $3 4 billion, an increase of $605 million during the quarter, driven by new solar and pipeline awards and roughly $200 million of added backlog from <unk>.
MSA backlog increased $296 million during the quarter to $2 1 billion, primarily driven by the acquisition of DLH.
Turning to our full year earnings guidance, we are adjusting our estimate of GAAP EPS down slightly to $2 31 to $2 51 per share directly related to incremental depreciation amortization and transaction and integration costs due to the <unk> acquisition.
However, we are maintaining our adjusted EPS guidance of $2 39 to $2 59 per share.
We saw the timing of certain work pulled into Q3 from Q4 and this provided a boost to Q3 results that supported our reasoning for leaving our adjusted EPS guidance unchanged in <unk>.
Q4, we expect to see continued growth in our energy renewable segment, a turning point in our pipeline segment and our typical seasonal decline in utilities, partially offset by a full quarter contribution from <unk> with.
With the continued strength of our solar business are expanding communications business and the addition of <unk>, we feel very good about our utilities and energy renewables business underscored by our record backlog with that I'll turn it back over to Tom for some closing comments.
Before we open the call for questions I want to reiterate three key points from today's call.
First we are seeing tremendous success growing our business, both inorganically through acquisitions and organically through footprint expansion in positioning ourselves well in markets that are poised for secular growth.
Second we are focused on not just growing revenue, but growing profitably.
We're placing emphasis on continuing to reduce project costs, while delivering quality services to the right customers and the wide markets.
And third we are operating in an economic backdrop with uncertainty around supply chain rising interest rates and inflation. However.
However, we are working to mitigate these impacts on our business by stocking materials when prudent menu.
Menu factoring our own components, working with vendors and customers all pricing and using free cash flow to manage our debt levels to allow for future growth and value creation for our shareholders.
I will now turn it over for questions.
You will have a question. Please press star one please limit yourself to one question and one follow up. Your first question is from Lee Jagoda CJS. Please go ahead. Your line is open.
Yes, good morning, it's Pete Lucas for Leigh can.
Can you talk a little bit about the dynamics you saw around hurricane Ian cleanup in Florida, and how much of a benefit to revenue and margin that could be in Q4 and is this factored into your Q4, our margin range for utility.
Okay.
Yes, it was.
Again, we mobilized.
Approximately 700 employees to Florida to help reestablish power delivered to all of our clients, but it wasn't youll see that reflected in our Q4 numbers, but it was it was just this might be a small part of those numbers and yes, it's in our forecast.
Okay.
Helpful. Thanks, and how should we think about sequential revenue growth, particularly in the energy segment given a lot of this work should be less seasonal than some of your other work has been historically.
Yes, we are expecting Q4 energy <unk> revenue to be up slightly maybe about 5% to 10% in Q4 from Q3.
Okay.
Perfect very helpful I'll jump back in the queue. Thanks.
Okay.
Your next question is from Adam Thalheimer of Thompson Davis. Please go ahead. Your line is open.
Hey, good morning, guys congrats on a good quarter.
Can you talk a little bit about that.
The bidding environment.
For solar and your outlook there for 2023.
Yes, Adam I can.
It's actually we're looking at now for right now it's hard to just boxes into 2023, but we.
We have a portfolio of projects that were either under contract four have been or in LNG for or are pursuing at different stages of either sole source short lessor to bidding of $8 billion.
So those projects will start execution anywhere from one of them already are already in the field. Some of them are in engineering. Some of them will start in 2023 and stuff and some of them will finish as far out as 2027.
The awards were better in Q3, and the bidding is better.
Well you are not going to see any cross country pipelines.
Youre not going to see a keystone unless something changes with the government with the regulatory process.
Yeah.
Raj the view that it's pull forward versus.
Yes, Jerry.
Sequentially I would expect Q4 revenue to be down slightly from Q3 and utilities, but despite the pull forward I would expect energy renewables revenue to be up slightly sequentially.
What's driving that.
Well some of it is just that.
Your next question is from Sean Eastman of Keybanc capital markets. Please go ahead. Your line is open.
Nice update here I guess, I guess really the one thing I would poke at is is the cash flow.
We definitely wanted to start seeing some cash flow. So could you talk about what we're going to see in the fourth quarter.
How much debt you think you can pay down in 2023.
That would be really helpful.
At next quarter at year end in February .
Second fixed cost return, just with that incremental 20% to $30 billion, yes. They.
Okay. Okay. That's helpful. And then one last one just around the.
The solar supply chain challenges I mean, obviously the bookings they're super strong the pipeline, they're super strong, but I'm just wondering how good of a line of sight you guys have on.
It seems like Thats re sequencing element is kind of keeping production flowing now, but but could we end up with a bit of an air pocket in the first part of next year as.
I think everybody is still evaluating the iras so.
It's almost like a chess game for us even just moving crews we've been working with our clients and have surety of supply.
And moving moving crews from projects.
We may have been delayed because of their supply has moved out two projects where clients have some more surety and been able to move those project teams over and so that has helped us to keep a pretty high utilization of our project teams and it's still.
The philosophy has been build the project out as much as you can.
And you can move away from that project mobilize on a new project set of smaller contingent accrues back to install the module when theyre. There that's working for some of our clients for other clients that they havent wanted to do that and they've got a facility that's not operating in it and so they put kind of pushed their schedules out which has actually helped us a little bit because then we've been able to move those.
Other projects, but it is a chess game for sure. Thanks.
A lot of collaboration between us and our clients.
Just back on the energy segment.
Both out west and along the Gulf Coast, So and we've been because we are at that group, especially our non Union group has been performing so well, we're actually seeing repeat business.
And we're seeing some actually opportunities in gas power generation, Ken just reminded me up so.
It's a mixed bag, so theyre not real big projects, but but theres, a theres a fairly large number of them because of the performance of our teams we've been able to and we've been able to be successful in winning that work.
Okay. Okay I appreciate that and then the numbers coming out of the communications business I know, it's a relatively smaller but pretty I question Tom.
Yes, sorry communication.
It's actually been a combination so the market is clearly growing we've been growing with our customers and.
I don't know if we've taken much market share, but maybe in certain markets, we might have taken a little bit of share Jason it's hard to measure that.
I mean, we have grown that communications business.
They're they're operating in Louisiana, Alabama, Mississippi, Georgia, Florida, Arizona.
We've moved into some new markets on the Denver, and Utah mid Atlantic regions also so, albeit small, but there are opportunities for us out there and we're winning our share of the work.
Okay. Thanks, guys.
Your next question is from Julio Romero with Sidoti. Please go ahead. Your line is open.
<unk> utilization on the cruise and the project teams are we when you can move them and you're getting compensated for the clients have been they've been very open and receptive to doing that.
Working around that are you kind of taking a shared.
A pause because they don't have the surety of supply and other clients that we've done some projects forward have wanted us to do more but they have surety of delivery, we've actually picked up more of their work. So we're doing a lot of work for some clients.
Now an entity will do into 2023 that we may have done one or two projects for in the past when we were successful and they wanted us to build our crews up for them, but we just weren't able to do and now those crudes are available.
Okay.
And could you talk a little bit more about the inflation reduction act and the impact on the solar business you talked about some of the incentives that for Morris can benefit from.
Folks are thinking about paying for some of these projects.
Well I mean, I've heard our clients will liken it to renewable solar business on steroids they are still evaluating.
What's in the act and how they might benefit from them as are we so it's a little early to be able to tell you.
Again, if you would like to ask a question. Please press star one on your telephone keypad.
Next question is from Avi Jaroslaw <unk> of UBS. Please go ahead. Your line is open.
Non solar backlog in the renewable segment.
Just kind of do you expect to burn more that over the next six to nine months and from the solar backlog or should burn be relatively similar to the backlog mix.
Yes.
Is it solar is industrial projects and Tom will talk a little bit earlier about some of the industrial projects that we're seeing and working on right now.
Most of those projects will burn in less than a year and then the balance of it is our heavy civil business and most of those projects are longer term projects that will burn over anywhere from probably a year to year and a half on the short end.
Our longest project right now probably about four years left to burn so it's pretty broad range, depending on the type of business and then margins are industrial margins are actually very consistent with our solar margins right now, especially with the strong performance this year.
Default heavy civil margins are less our heavy civil margins generally run in the seven gross margins junior ones up to 8% range versus the rest of the segments.
Kind of 10 to 12% to 13%.
Got it okay. That's helpful.
And then in terms of margins in our utilities business. So it sounded in your comments like it's still not quite covering all the increased costs in that business.
Pricing. So just wondering if you could discussing dynamics there.
There have been more pushback on pricing than expected or.
Well you saw the benefit of the negotiations that took place earlier in the year certainly in the first and second quarter on the on what they did they affect it had on our numbers in the third we expect we're still negotiating with some clients and we have some clients that have msas that are renewing at the end of the year or towards the end of the year, but wanted to wait and negotiate those.
Writes Dan So, we'll see it's going to be less of an impact, although I guess positive or negative.
The balance of the year.
But there are also clients that don't want to talk or don't want arent willing to negotiate will move away from them. We have moved away from some of those so again, there's going to be some positives upsides to those negotiations at the end of the year, but it won't be as significant as what you saw between the second and third quarters.
Okay got it I appreciate the color thanks for the time.
There are no further questions at this time I will now turn the call over to Tom Mccormick for closing remarks.
In closing we are optimistic about the future for Morris, we have great businesses with strong leadership leaders, who prioritize serving their customers through quality execution and reducing contract risk. We are working to increase our exposure to markets with multi year investment <unk>, both organically and inorganically while generating.
Consistent cash flow in our mature markets to fund this investment and create long term shareholder value.
I want to thank all of our employees for continuing to work safely and for all their hard work and dedication in meeting our customers' needs.
Thank you again for joining us this morning and for your interest in <unk> have.
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