Primoris Services Corporation Q1 2023 Earnings Call
Good morning, My name is Emma and I will be your conference operator today.
At this time I would like to welcome everyone to the premiere services Corporation's first quarter 2023 earnings conference call. All lines have been placed on mute to prevent any background noise.
After the Speakers' remarks, there'll be a question and answer session.
Like to ask a question during this time simply press star followed by the number one on your telephone keypad if.
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Blake Holcomb, Vice President Investor Relations you May begin your conference.
Good morning, and welcome to grow Morris first quarter 2023 earnings Conference call. Joining me today with prepared comments are Tom Mccormick, President and Chief Executive Officer, and Ken Dodgen Chief Financial Officer.
Before we begin I'd like to make everyone aware of certain language contained in our safe Harbor statement.
The company cautions that certain statements made during this call are forward looking and are subject to various risks and uncertainties actual results may differ materially from our projections and expectations.
These risks and uncertainties are discussed in our reports filed with the SEC.
Forward looking statements represent our outlook as of today May 10, 2023, we may 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 in the investors section of our website and in our first.
For 2023 earnings release, which was issued yesterday.
I would like to now turn the call over to Tom Mccormick.
Thank you Blake.
Good morning, and thank you for joining us today to discuss our first quarter 2023 financial results and update on our operational performance and market outlook.
Well Morris kicked off 2023 with a solid first quarter our teams around the country executed their job safely and efficiently to help us exceed our goals for safety revenue and gross profit as well as establish another record high for backlog.
We accomplish these milestones in the face of the economic uncertainty caused by failing financial institutions and the increasing likelihood of a recession on the horizon.
I am proud of our employees response to these challenges and I want to thank them for their contributions to our success.
Their efforts in the first quarter has set a solid foundation for us to continue executing at a high level for the remainder of the year and achieve our annual objectives.
Now, let's look at our operational performance and more closely by segment.
Beginning with the utility segment, we were able to outperform our expectations for the quarter and all of our key metrics.
Revenue gross profit and backlog.
The first quarter is generally our lowest revenue and margin quarter compared to the remainder of the year.
This is often due to delays from winter weather conditions and the allocation of MSA work from customers that often begins to ramp up in the back half of the quarter.
Stronger than anticipated work in southern California, and milder weather conditions in other geographies allowed us to execute a more backlog than anticipated.
We saw solid growth in our legacy power delivery and communication business that complemented the contributions from our <unk> and <unk> acquisitions, where we continue to make significant progress in our integration process.
The combined businesses are operating smoothly and we are making progress negotiating increases to MSA rates that are not in line with the current market.
In fact, we submitted several high profile power delivery MSA renewals during the quarter that we expect will help cement our future backlog at updated market rates.
These and other successful customer engagements resulted in our booking more than $650 million of new business in this segment during the quarter.
We also made some modifications to our organizational structure in the segment during the quarter that we believe will allow us to better serve the needs of our customers operate more efficiently.
First we brought in additional talent that will strengthen our leadership teams, particularly in power delivery.
Second we made changes to align our leadership to focus on our commercial efforts by product and service lines, rather than by region in order to better target the breath of our customers' needs across multiple geographies.
Finally, we are focusing increased attention on bidding and winning more project work in our power delivery business.
Morris has made substantial progress over the years in establishing strong long term relationships with customers and increasing our mix of revenue that comes from msas across all of our businesses.
This will remain a focus for us going forward as we believe it drive stability and predictability of our revenue in this segment.
However, we believe that our current volume of major projects, including transmission and substation work, which represent less than 10% of current backlog can be further optimized.
We have both the necessary expertise and market opportunity to improve our balance of project and MSA work.
Specifically in our power delivery operations.
Greater balance between project and MSA work will deepen our client relationships by broadening our service offerings in a growing market and should enable us to expand segment margins turning to the energy segment. We saw similar seasonal outperformance driven by strong topline and margin growth from our renewables industrial and pipeline services business.
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Third to the first quarter of 2022.
In renewables, we had another quarter of solid execution from our solar business.
Is experiencing a very robust project pipeline.
We continue to strive to operate in a manner that will allow us to achieve market outperformance in an industry that continues to experience. Some bumps in the road from both a macro and political perspective.
While overall the driver of anticipated growth in the coming years, the delay on the inflation reduction that guidance is still causing some hesitation by our customers in the near term until a full guidance as issued.
However, given our solid backlog of projects, we do not expect this delayed guidance to have a material impact on our ability to meet our performance objectives. This year.
We anticipate the IRA guidance will be issued to the market in the coming quarters and will reaffirm the expected opportunities and increased backlog from the pipeline of projects we have in the quarters ahead.
Additionally, while there has been improvement in recent months the market is still experiencing some module tariff delays in early to mid 2023.
However by remaining disciplined and the partners, we choose to work with and who have worked hard to secure module supply. We do not currently see significant risk to our projects.
Furthermore, we expect the supply chain for modules will continue to improve through the course of the year.
Finally, due to the rapid growth of the market. There has been price movement on other materials used in the construction of projects.
We have been able to mitigate these inflationary impacts by pre buying equipment and materials and unnecessary lock.
Locking up manufacturing allocations.
Self performing that work for our clients and lowering our pricing risk due to market changes prior to executing a contract.
Renewables opportunities outside of solar also continue to present themselves in the markets. We serve as our economy looks to transition to a more diverse and less carbon intensive energy sources.
During the quarter, we booked the first of what we believe will be many opportunities for carbon capture utilization and storage pipeline projects are CCC U S.
These pipelines will fit well with our engineering and construction capabilities and can play a key part in a lower carbon future.
In addition to CCC U S opportunities.
We also are pursuing a sales funnel of more than 50 hydrogen biomass and renewable natural gas projects that could lead to hundreds of millions of dollars more in revenue over the next several years.
Our traditional energy portfolio of services is also off to a strong start in 2023.
We are beginning to see green shoots supported by infrastructure investment legislation in a growing LNG export market in the Gulf Coast that is driving increased bidding activity.
While it remains only 10% of our overall revenue we believe we've seen the trough in our pipeline services.
In fact, we are seeing a steady growth in bid volumes are small and medium regional projects and have returned the business to positive margins following a difficult environment 2022.
The market remains competitive and permitting challenges persist, but we are optimistic that further improvement in revenue and margins is on the horizon.
With that I'll turn it over to Ken for more on our financial results.
Good morning, everyone. Our revenue of $1 $2 6 billion was a first quarter record for <unk> and up over $472 million from the prior year driven by growth in both of our segments.
The energy segment was up $302 million or 71% from the prior year, our renewables business contributed over $100 million of that growth along with our pipeline and industrial businesses.
Utility segment also saw strong growth of $170 million up 47% from the prior year driven by expected growth in our power delivery and communications businesses.
Gross profit for the first quarter was approximately $100 million, an increase of $43 million from the prior year, primarily due to higher revenue improved revenue mix and higher gross margins.
Gross margins were seven 9% for the quarter, which was an improvement over seven 2% in the prior year.
Looking further at our segment results in the utility segment gross profit was $33 6 million up over 50% compared to the prior year due to higher revenue and slightly better gross margins at six 3%.
This was driven by top line growth in our power delivery and communications businesses, along with some milder weather during the quarter that allowed our gas operations to see improved productivity.
As is typical in this segment, we expect to see gross margins improve the remainder of the year to achieve our 9% to 11% range. Following the seasonal lows in Q1.
In the energy segment gross profit, which now includes pipeline was $66 2 million for the quarter of $32 million increase from the prior year due to both higher revenue and improved margins.
Gross margins came in at nine 1%, which is an improvement from 8% in the first quarter of last year.
The higher gross margins are the result of improved mix renewables work, which accounted for one third of our revenue during the quarter and improved margins in our industrial and pipeline businesses.
Similar to our utility segment, we would expect to see revenue and gross profit gradually increase in the coming quarters as we continue to grow our renewables business and make progress on our sizable backlog in the entire segment.
Taking a look at our SG&A expenses in the first quarter was 78 million an increase of almost $23 million over the prior year, but in line with our expectations the.
The increase in SG&A is primarily due to the additional <unk> SG&A and incremental cost to support our strong organic growth. However, as a percent of revenue SG&A declined to six 2% from seven 1% in the prior year due to stronger revenue growth demonstrating improved operating leverage in the quarter we.
SG&A for the full year to continue that trend in the low 6% range.
Net interest expense in the first quarter was $18 5 million compared to $2 9 million in the prior year.
The increase was due to higher average debt balances and higher average interest rates. We continue to anticipate our full year interest expense to range between 73 and $77 million.
Our effective tax rate was 28% for the quarter and we expect this rate to be consistent for the full year, depending on the states in which we work and on non deductible components of per diem expenses.
Earnings for the quarter were improved across the board from the prior year.
EPS increased by <unk> <unk> per share and adjusted EPS increased by <unk> 17 per share.
More importantly, net income increased to $1 3 million, an increase of $3 million from the prior year and adjusted EBITDA increased to $52 8 million, an increase of over $30 million or 133, 5% from the prior year.
Turning next to cash flow Q1 saw cash used in operations of $115 3 million. The primary driver was higher accounts receivable unbilled revenue and retention as a result of the significant revenue growth.
In addition, utilities customers generally have longer payment terms are required greater documentation to support our invoices, which also contributes to higher accounts receivable and higher contract assets.
We are taking steps to improve both our billing and collections in order to maximize our ability to convert revenue to cash. We are also working to reduce retention requirements improved payment terms or include more upfront cash payments for mobilization and demobilization and many of our new contracts.
We are confident that as we make progress on these initiatives over the next couple of years, we will see a more balanced working capital position as well as improved cash flow.
We ended the quarter with $94 8 million of cash and net debt of approximately $1 billion borrowing capacity under our revolver was $177 7 million provided in total available liquidity of $272 5 million at quarter end.
Total backlog at the end of the quarter was a little under $5 6 billion compared to $4 billion in the prior year, an increase of 38%, resulting in another record backlog.
Fixed backlog increased to $3 5 billion up over $1 1 billion or 47%, primarily due to strength in our energy segment.
MSA backlog was up 25% or $408 million to a little over $2 billion driven by organic growth in our communications and power delivery businesses along with acquisitions.
We expect 100% of our utilities backlog and 60% of our energy backlog to convert into revenue over the next four quarters.
And finally, turning to our full year earnings guidance, we are reiterating our full year EPS guidance of 210 to $2 30 per share.
Adjusted EPS guidance of $2 50 to 270 per share and adjusted EBITDA guidance of $350 million to $370 million for the full year 2023, while Q1 exceeded our expectations a portion of it was driven by projects and revenue that we expected later in the year.
But with this strong start to 2023, we are optimistic that we can move toward the higher end of our guidance ranges. If our end markets to continue this positive trend.
With that I'll turn it back over to Tom.
Thanks, Ken.
Before we open up the call to your questions I'd like to restate a couple of key points in areas of emphasis for <unk> in 2023.
First across all our companies, we are committed to safety quality and productivity and in that order.
We believe that executing well in these areas will allow us to be the employer of choice to attract top talent to.
To grow our share of work with our existing customers.
Open the door to new customers and improve profitability to grow the company to the benefit of our shareholders.
Next we are beginning to see the early signs of the benefits of recent federal legislation to increase infrastructure investment and communications highways.
Highways and bridges renewable energy and electric grid improvements.
Although it's still awaiting clarity and administration of financial resources in many cases, the overall trend appears to be heading in a positive direction and many of our markets.
Third we have updated our commercial strategy in the utility segment that we believe will allow us to offer better service to our customers and be more productive in managing our skilled labor.
This includes a more product line centric sales and operating structure and increasing our mix of project work specifically in power delivery, which now represents more than half of the segment.
Yes.
Finally, we are optimistic that 2023 will be a year of great opportunity for Morris.
A year with the potential to set new records in revenue and backlog as a company.
But also to lay the foundation for improving our profitability and consistently generating free cash flow.
Converting our revenue to cash and paying down debt remains a top capital allocation priority for us.
We believe that reducing our leverage through a combination of growth and debt reduction will offer us flexibility to make further investments in per Morris to the benefit of our employees customers and shareholders.
We will now open up the call for your questions.
As a reminder, if you would like to ask a question Crestar followed by then everyone on your telephone keypad.
Again, we ask that you limit yourself to one question and one follow up.
Your first question comes from the line of Steven Fisher with UBS.
Your line is now open.
Thanks, Good morning.
Tom You mentioned a desire to have more MSA versus project mix can you talk a little bit about what you think what the mix is youre trying to achieve there is a general target range that you want to have.
Yesterday, we talked about in the past.
Said somewhere between $75 30, 70, 525, or 80 20, something a little bit more right now we're about 10% project mix and what projects do is they give you an opportunity to provide services to your clients.
Paul cap and larger capital projects that are a little bit higher margins that will drive your margins up and.
Plus it keeps your pencil sharpened keeps our operations and our project management people cane, so I'd like to get it a little bit higher than that 10% certainly somewhere around 70, 525, I think it would be ideal 70, 30, we'd even goes high but probably no more than that.
Okay and then it's good to see the carbon capture project into backlog can you just talk about to what extent there is any kind of first of a kind.
Elements to that project and how.
Higher manage that first of a kind of risk.
Well, it's not really first of its a pipeline project as well as this fall a little bit smaller diame versus not but what we've typically seen the 24 to 36 inch 42 inch gas pipelines.
Probably a lot more number of tie ins because it ties into a number of facilities.
So the pace of the work that we're doing is about 160 166 miles. So it's pretty typical pipeline project for us to be honest with you.
Okay terrific I'll turn it over.
Your next question comes from the line of Lee Jagoda with CJS Securities. Your line is open.
Hey, good morning.
Just starting with the.
The MSA renewals that you talked about on the call can you kind of give us some quantification of the size and scale of the renewals that you've submitted and maybe the timing that you expect and the potential margin uplift versus current levels, assuming that you get what's in those contracts.
Yes Lee.
I don't know how many are outstanding right now to be honest with you, but in any particular quarter, where probably negotiating.
Anywhere from probably $25 million to $50 million of contracts, depending on the depending on the quarter.
With respect to margins.
In aggregate because we've already done.
<unk> done a lot of the heavy lifting but still have more to go, especially as we've talked about last quarter for.
For the <unk> customers.
I would I would hope and expect that we've got at least a full 100 basis points improvement coming over the course of the next year.
Year to year and a half at most.
Got it and then.
Just can we.
Can you kind of dive into the segments, a little bit more because now that we've rolled them up we really can't see.
Whether there are any meaningful puts and takes within the various businesses that impact margins. So are there or is there anything either outsized positive where outsize negative that you would.
Look at it as something that could.
Persist over the next several quarters that would either be beneficial or a potential headwind to margins as you look at the next couple of quarters.
I think the biggest thing we're seeing now is consistency across it within each one of the segments I think theres. Some improvements that we talked about late in the latter part of the year going into next year that pipeline will bring to the energy segment for the balance of the businesses in energy are actually performing pretty well in civil continued to contribute and be consistent in their performance.
Get into utilities, I think theres still some up some benefit there is some improvement that will be made in power delivery by communications and gas are continuing to perform well and I think some of the power delivery will be just as Ken talked about it would be just renewing some of those msas with some of them are performance fibers.
Perfect. Thanks very much.
Your next question comes from the line as Sean Eastman with Keybanc your.
Your line is open.
Hi team thanks for taking my questions.
Firstly just on the cash.
Are we still on pace for that kind of 100 to 150 million operating cash flow range, maybe I missed it.
Yes. Good question, Sean Yes, we absolutely are.
A lot of this this quarter was just timing of projects starting that impacted it but.
But yes, we're still right on track for that.
Okay excellent and then.
Relative to some of the commentary on the power delivery business development efforts some of that seem new I just wanted to understand.
Make sure I understand what you guys are trying to do there where the where the margin enhancement element comes from and also if you could comment on the strength in the legacy power delivery.
Operation that you highlighted in the first quarter that would be interesting to hear about as well.
So I think the improvement is going to come from taking on more project work increase in that percentage of our overall versus MSA, which we spoke about earlier and then there's some performance our power delivery group.
Very.
Pockets of excellence I would say is if you look at the different regions that they work.
And we have some areas where they need they need improvement you saw in the announcement, we talked about adding some management tool to help strengthen that management team and that's what we've done and they are taking over some of these areas that needed help and we expect to see and what we hope.
We will see benefit to those individuals' joining the company so.
I think from that standpoint, as they renew these msas and we take on a little bit more project works will help to help them expand their margins youre going to see improvement there.
And then in terms of taking on more project work is that a function of the pipeline.
More project base work, having firmed.
Yes, I just wanted to understand kind of the background there.
The opportunities are there as having to have and the capabilities within the company and that we have the capabilities within the company to do that work EPC.
And performing just doing that type of work. It takes a specialty type of people with broad experience and we have those people in the company have.
<unk> had some but not not enough to really take on just an objective to grow that market, but we do know already and we're looking to to grow it.
Got it Okay and then last question just to confirm.
Just relative to the noise in the operating environment. It sounds like you guys are saying you are still on track to achieve that kind of big 30% plus growth outlook.
For the solar operation is that correct.
That is correct.
Excellent I will turn it over thanks.
Your next question comes from the line of Julio Romero with Sidoti <unk> Company. Your line is open.
Thanks, Hey, good morning.
Maybe staying on solar.
Sure. If you guys broke out how much the solar revenue was in the quarter.
I would say it was about a third of the segment revenue for energy.
Okay got it and could you speak to the conversion rate.
Backlog you did on the solar and if we should expect to see the same kind of rate as we progress throughout the year.
Yes conversion rate has been very consistent there.
As we've talked about before we have a great set of customers we have.
<unk> been adding customers.
Every year for the past few years.
I don't think we've seen any degradation of our conversion rate if anything gets maintained or gotten a little bit stronger.
Got it and then just last one is just on the you talked about the delay on the IRR guidance still call. It some hesitation on the solar side can you just maybe talk to how you think orders might trend after that IRS guidance is issued and just give us a sense of.
How much.
And if demand might be might be there.
Yes, I'm not sure I can give you how much the demand might be but.
Expectations.
We'll definitely accelerate the opportunities will accelerate what's clients get a clear definition of what what those expectations and requirements are and understand what contractors. So they can work with that meet those requirements, we expect it to accelerate.
Great. Thanks very much.
Your next question comes from the line of Adam Thalheimer with Thompson Davis Davis Your line is open.
Hey, good morning, guys nice quarter.
Hey.
Can you level set us a little bit in.
In terms of how you expect the ramp to take place. This year from Q1 into Q2, and then Q2 into Q3, and then probably a seasonal falloff in Q4.
I'm just thinking on the EBITDA side.
Yeah on the EBITDA side.
I don't have.
I can't give you the exact cadence of that but it's going to be progressively higher as we move from Q2 into Q3, just like normal.
And depending on the timing of projects, especially some of the solar projects, we may see a little bit less of a drop off in Q4 than we have in previous years, but overall it should be.
Very similar at a good strong year for us.
Okay.
And then.
Second question would be.
Hundreds of utility Msas.
I guess, we are in the May now so are you seeing any budget cuts from your customers due to macro.
Or would you say your customers still have a lot of work to get done for the rest of the year.
We have not seen any cuts.
Sure.
Our expectations.
Our that our clients have a lot of work to be done by the end of the year.
Sounds good thanks, Tom.
As a reminder, if you would like to ask a question press star followed by the number one on your telephone keypad.
Your next question comes from the line of Brent Thielman with D. A Davidson.
Your line is open hi, thanks.
Thanks, Good morning, Tom Ken.
When you think about the contract renewal process and utilities it sounds like that.
Process sort of continues into next year as these various contracts come up does that ultimately keep you from getting to the upper end of that margin range for that segment. This year, I guess any way to assets or what other elements could.
Can get you still get to that this year.
Yes.
Tom and I were looking at each other on Alex look what's going to drive us to the top end of our range on utilities is two things first of all continued contract negotiations. There is no question about that but.
But the second one is what Tom referenced which was our mix of MSA versus project work right now it's below our target level as we as that.
As that mix trends toward.
Up from kind of 10% up to as much as 45% like we're targeting right now that will drive the margins up towards the upper end of the range as well.
And there is still a shot at that this year, Ken I guess is what I'm asking.
I mean.
And right now, we're expecting kind of at the midpoint of our range high nines to around 10% this year, but yes, if we're able to pick up some more project work towards the end of the year, we can definitely see margins trend about the 10% range.
Maybe closer to 10 five overall for the year, you should see them trend up as the year for risks.
Yes.
Yes, okay.
Maybe just taking a step back you guys do usage.
<unk> owned it for a few quarters now I mean, how do you feel like it's integrating into the overall company.
Any thoughts there.
No I think the integration is going well with that.
Definitely we're happy to have this.
Craft resources and the equipment.
Key members of their management team are performing well, we have some some pockets of that business that are actually performing better than we had expected. So I think it's there are a welcome addition to <unk>.
Okay, and just lastly, what sort of opportunities are you starting to see become available for LNG on the Gulf coast perform ensign and how significant could these be.
Well, we're not a general contractor when it comes that large LNG facilities that we do do subcontract work for a number of the contractors and it's created an ever opportunities for us.
Thank you.
Ill standpoint for specific businesses, it's a great opportunity for our energy group on the industrial side.
Other businesses it won't affect.
Okay, all right. Thanks, guys.
There are no further questions at this time I'll turn the call back over to Tom for closing remarks.
Thank you operator.
We appreciate your questions and your investment for Morris.
Just close by recapping, what I see in the three key takeaways from this quarter.
Our strong first quarter results have set us on a solid path toward achieving our 2023 goals.
We see opportunities to advance our strategic growth markets in renewables communications and power delivery driven.
Driven by secular market tailwind and through offering services to our customers that leveraged expertise across our segments.
And finally, we will.
Disciplined in how we bid work diligent in the execution of projects and mindful of the allocation of resources to improve profitability and generate consistent cash flow.
Thank you and we look forward to updating you on next quarter.
This concludes today's conference call. Thank you for attending you may now disconnect.
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