Q3 2023 MYR Group Inc Earnings Call
Okay.
Yeah.
Good morning, everyone and welcome to the MYR Group third quarter 2023 earnings results Conference call. At this time all participants are in listen only mode. After the speaker's presentation there'll be a question and answer session.
To ask a question during the session you will need to press star one one on your telephone you will then hear an automated message advising your hand is raised to withdraw your question. Please press star one again.
Today's conference is being recorded at this time for opening remarks, and introductions I would like to turn the conference over to David Good T. Erez corporate services. Please go ahead David.
Thank you and good morning, everyone I'd.
I'd like to welcome you to the MYR Group conference call to discuss the company's third quarter results for 2023 of which were reported yesterday.
Joining us on today's call are Rick Swartz, President and Chief Executive Officer Kelly.
Kelly Huntington Senior Vice President and Chief Financial Officer.
Cooper Senior Vice President and Chief operating officer of MYR, groups' transmission and distribution segment and.
And Don Egan, Senior Vice President and Chief operating officer of MYR group's commercial and industrial segment.
If you did not receive yesterday's press release, please contact dresner corporate services at 3127 to 630 600, and we will send you a copy.
Well go to the MYR group website, where a copy is available under the Investor Relations tab also a webcast replay of today's call will be available for seven days on the investors page of the MYR group website.
Mm wire group Dot com.
Before we begin I want to remind you that this discussion may contain forward looking statements any such statements are based upon information available to MYR groups' management as of this date.
Wire group assumes no obligation to update any such forward looking statements.
These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward looking statements.
Accordingly. These statements are no guarantee of future performance. These risks and uncertainties are discussed in the company's annual report on Form 10-K for the year ended December 31, 2022, the company's quarterly report on Form 10-Q for the third quarter of 2023 and in yesterday.
<unk> press release.
Certain non-GAAP financial information will be discussed on the call today.
A reconciliation of these non non-GAAP measures to the most comparable GAAP measures is set forth in yesterday's press release.
With that said, let me turn the call over to Rick Swartz.
Thanks, David Good morning, everyone welcome to our third quarter 2023 conference call to discuss financial and operational results I will begin by providing a summary of the third quarter results and then we'll turn the call over to Kelly Huntington, Our Chief Financial Officer for a more detailed financial review following Kelly's overview Todd.
Cooper and Don Egan, Chief operating officers of our T&D and C&I segments will provide a summary of our segment's performance and discuss some of them why our group's opportunities going forward. I will then conclude today's call with some closing remarks and open the call up for your questions.
The strength of our long term customer relationships and a strong market position resulted in a steady third quarter performance.
Our teams continued to execute projects with operational excellence and expand existing client relationships through Master service and alliance agreements across our districts.
Bidding activity remains healthy as we are strategically pursue and capture new opportunities that position us for potential future growth.
Rowing demand for electrification a continued emphasis on the clean energy sources and a focus on grid modernization and hardening continue to be strong market drivers and could present opportunities for consistent success across our business.
The 2023, North American Electric electric transmission forecast released in September by the C. III group indicates a strong potential for healthy growth moving forward as electricity demand continues to increase across the country.
The report projects the $172 billion of spending on new transmission or upgrades over the next five years from the top 20 investor owned utility.
Carbon reduction goals and clean energy targets or other potential spend drivers in the T&D market. We continue to track. These major transmission expansion projects and clean energy initiatives that may lead to future work opportunities in growth, while remaining committed to executing existing projects for our valued customers.
<unk> and.
In our C&I segment industrial spend projections are positive in our key markets such as data centers health care transportation and manufacturing even as the overall commercial market are forecast to just slow down into 2024 by.
By expanding existing relationships with our preferred clients and strategically bidding theyre expanding work in our chosen markets. We continue to experience a steady backlog of work and could see potential growth moving forward.
The commitment and solution oriented mindset of our people allows us to remain at the forefront at forefront of the industry and provide our clients with excellent service and customer experience backed by safe and reliable execution. Our steady third quarter performance is a result of their tireless efforts and I would like to thank.
Further fostering a strong culture.
Now Kelly will provide details on our third quarter 2023 financial results.
Thank you rich and good morning, everyone.
Our third quarter 2023 revenue $939 million.
Our record high.
It represents an increase of $140 million.
17%.
Here to the same period last year.
Our third quarter T&D revenues were $549 million a record high for our T&D segment and.
And an increase of 21% compared to the same period last year.
The breakdown of T&D revenues with $358 million.
For transmission.
And $191 million for distribution.
With record.
T&D segment revenues increased.
Revenue on transmission projects, primarily related to higher revenue on clean energy projects.
Work performed under Master service agreement continued to represent approximately 50% of our T&D revenue.
C&I revenues were $391 million a record high for our C&I segment, and an increase of 12% compared to the same period last year.
C&I revenues increased primarily due to higher revenue related to clean energy project in certain geographical areas.
Our gross margin was nine 8% for the third quarter of 2023 compared to 10, 8% for the same period last year.
Increase in gross margin was primarily due to labor and project inefficiencies.
Some of which were caused by supply chain disruption and inclement weather.
Gross margin was also negatively impacted by rising costs associated with it in places.
These margin decreases were partially offset by a favorable change order.
Anticipated productivity on certain projects.
<unk> operating income margin was six 6% for the third quarter of 2023 compared to seven 6% for the same period last year.
The decrease was primarily due to labor and project inefficiencies mainly related to clean energy project.
Well.
Inclement weather.
These decreases were partially offset by better than anticipated productivity.
Operating margin was three 6% for the third quarter of 2023.
Compared to three 1% for the same period last year.
Increase was primarily due to favorable change orders.
Other than anticipated productivity on certain projects.
These increases.
Offset by Labor and project inefficiencies.
Great.
By chain disruption in <unk>.
Clinton is weather.
C&I operating income margin was also negatively impacted by rising costs associated with inflation.
Third quarter 2020.
Please for $60 million, an increase of $1 million compared to the same period last year.
The increase was primarily primarily due to higher employee incentive compensation.
And higher employee related expenses to support the growth in our operation.
Third quarter 2023 interest expense was $1 million in it.
Increase of $200000 compared to the same period last year.
The increase was primarily due to higher interest rates, partially offset by lower average debt balances during the third quarter of 2023.
Paired with the same period last year.
Third quarter 2023, net income was $22 million compared to $18 million for the same period last year.
Net income per diluted share of $1 28.
Increased 17% compared to $1 and mine plan for the same period last year.
Third quarter 2023 with.
With $47 million.
Compared to $40 million for the same period last year.
Total backlog as of September 32023, with $2 62 billion.
6% higher than a year ago.
Backlog as of September 32023 consisted of $114 billion for our T&D segment.
148 billion.
Our C&I segment.
Third quarter 2023, operating cash flow of $13 million compared to operating cash flow of $14 for the same period last year.
Third quarter of 2023 free cash flow was negative $10 million.
Free cash flow of negative $4 million for the same period last year.
With the decrease primarily due to higher capital expenditures to support our continued growth.
Moving to liquidity and our balance sheet, we had $292 million of working capital $62 million of funded debt and $432 million in borrowing availability under our credit facility as of September 32023.
Operator: Good morning, everyone, and welcome to the MYR Group 3rd quarter, 2023, Earnings Results Conference Golf. At this time, all participants are in listen only mode. After the speaker's presentation, there'll be a question and answer session. To ask a question during the session, you will need to press star 11 on your telephone. You will then hear an automated message, advising your hand is raised. To withdraw your question, please press star 11 again. Today's conference is being recorded.
We have continued to maintain strong funded debt to EBITDA leverage ratio of 033 times as of September 32023.
We believe that our credit facility strong balance sheet and future cash flow from operations will enable us to meet our working capital needs support the organic growth of our business pursue acquisitions and opportunistically repurchase shares.
I'll now turn the call over to Tod Cooper, who will provide an overview of our transmission and distribution segment.
David Gutierrez: At this time, for opening remarks and introductions, I would like to turn the conference over to David Gutierrez, Corporate Services, please go ahead, David. Thank you, and good morning, everyone. I'd like to welcome you to the MYR Group Conference call to discuss the company's 3rd quarter results for 2023, which were reported yesterday. Joining us on today's call are Rick Schwartz, President and Chief Executive Officer, Kelly Huntington, Senior Vice President and Chief Financial Officer, Todd Cooper, Senior Vice President and Chief Operating Officer of MYR Group's Transmission and Distribution Segment, and Don Egan, Senior Vice President and Chief Operating Officer of MYR Group's Commercial and Industrial Segment.
Sure.
Thanks, Kelly and good morning, everyone.
Our T&D segment steady financial performance for the third quarter demonstrates the strength of our long term customer relationships and the reliability of our sound business principles.
Our districts continue to maintain and expand strong client relationships, while a healthy bid environment strategic wins throughout our markets.
A very nice backlog of work.
As Rick mentioned, we're seeing significant investments in electrical infrastructure throughout North America, including many transmission upgrades substation expansion and distribution partner programs.
David Gutierrez: If you did not receive yesterday's press release, please contact President and Corporate Services at 312-726-3600, and we will send you a copy. Or go to the MYR Group website where a copy is available under the Investor Relations tab. Also, a webcast replay of today's call will be available for seven days on the Investor's page at the MYR Group website at MYR Group dot com.
According to the 2023, North American transmission forecast recently released by the C. Three group.
The total electric transmission capital spend in 2022.
$43 billion and is forecasted to grow as high as $67 billion in 2027.
This investment is expected across the country with Texas and California.
David Gutierrez: Before we begin, I want to remind you that this discussion may contain forward-looking statements. Any such statements are based upon information available to MYR Group's management as of this date, and MYR Group assumes no obligation to update any such forward-looking statements. These forward-looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward-looking statements. Accordingly, these statements are no guarantee of future performance. These risks and uncertainties are discussed in the company's annual report on Form 10K for the year ended December 31, 2022.
Focus areas for MYR group, having the highest planned transmission capital expenditures.
The report also indicated a significant load growth driven by Hyperscale data centers is increasing the need for additional substation infrastructure and transmission interconnections around North America.
Overall, the CBRE report stated that investor owned utilities represent roughly 60% of the total U S electric transmission market.
It is considered the most stable and predictable about sectors.
The need for new and upgraded.
Dr. <unk> has the potential to create future opportunities for our business.
David Gutierrez: The company's quarterly report on Form 10K for the third quarter of 2023, and in yesterday's press release. Certain non-gap financial information will be discussed on the call today. A reconciliation of these non-gap measures to the most comparable gap measures is set forth in yesterday's press release.
Our traditional T&D operations continued their strong execution of work throughout our operating territories.
Our eastern region was awarded multiple transmission line projects as well as substation expansions and upgrades to the third quarter.
Subsidiary Elli Myers company extended several master service agreements and multiple districts.
Rick Schwartz: With that said, let me turn the call over to Rick Schwartz. Thanks, David. Good morning, everyone.
Just a bit others, while he is bluelinx and Heartland electric executed three year MSA.
Rick Schwartz: Welcome to our third quarter of 2023 conference call to discuss financial and operational results. I hope we begin by providing the summary of the third quarter results, and then we'll turn the call over to Kelly Huntington, our Chief Financial Officer for a more detailed financial review. Following Kelly's overview, Todd Cooper and Don Egan, Chief Operating Officers of RTND and CNI segments, we'll provide a summary of our segments performance and discuss some of MIR Group's opportunities going forward.
In our Western region, we continued to expand work with trusted long term clients, including our fast track storm damage transmission line repair project in.
Texas by Great southwestern construction.
Rising labor cost and project inefficiencies, some weather related and most notably in the solar market persisted across the segments.
These along with supply chain disruptions impacted financial results for Q3, while we see rising labor costs stabilizing our strategic insight survey appliance conducted this year to shed some light on supply chain constraints our clients face.
Rick Schwartz: I will then conclude today's call with some closing remarks and open the call up for your question. The strength of our long-term customer relationships and a strong market position resulted in a steady third quarter performance. Our teams continue to execute projects with operational excellence and expand existing client relationships through master service and alliance agreements across our districts. Fidding activity remains healthy as we strategically pursue and capture new opportunities that position us for potential future growth.
To help mitigate supply chain constraints, our clients are expanding their roster of suppliers and working diligently with them to form better working relationships.
<unk> Group also continues to work in close collaboration with our robust network of vendors.
Customers to help mitigate supply chain challenges and advanced projects to successful completion.
Rick Schwartz: A growing demand for electrification, a continued emphasis on the clean energy sources, and a focus on grid modernization and hardening continue to be strong market drivers and could present opportunities for consistent success across our business. The 2023 North American Electric Transmission Forecast released in September by the C-3 Group indicates a strong potential for healthy growth moving forward, as electricity demand continues to increase across the country. The report projects $172 billion of spending on new transmission or upgrades over the next five years from the top 20 investor owned utilities.
In summary, our T&D segment remains committed to partnering with our valued customers.
Basically provide excellent project delivery.
Strengthening and expanding those relationships are mutually beneficial outcomes.
And thank you to our talented employees for helping us reach our high quality standards every day.
We are excited about the outlook at the T&D industry and look forward to playing a key role in helping to meet the future demand in North America.
I will now turn the call over to Don Egan, who will provide an overview of our commercial industrial segment.
Thanks, Todd and good morning, everyone.
The third quarter saw a steady performance in the C&I segment, as we continued to strengthen and leverage strong relationships with our valued customers, while professionally executing projects and strategically bidding opportunities in our chosen core markets.
Rick Schwartz: Carbon reduction goals and clean energy targets are other potential spend drivers in the T&D market. We continue to track these major transmission expansion projects and clean energy initiatives that may lead to future work opportunities and growth while remaining committed to executing existing projects for our valued customers. In our CNI segment, industrial spend projections are positive in our key markets such as data centers, health care, transportation, and manufacturing. Even as the overall commercial markets are forecasted to slow down into 2024.
As Rick mentioned earlier, while overall commercial spending is forecasted for a slight slowdown going into 2024, there are positive signs of growth in our chosen markets such as data centers health care transportation and manufacturing.
The consensus construction forecast from the American Institute of Architects are released in July projects growth in industrial construction spending into 2024.
Rick Schwartz: By expanding existing relationships with our preferred clients and strategically bidding and expanding work in our click chosen markets, we continue to experience a steady backlog of work and could see potential growth moving forward. The commitment and solution-oriented mindset of our people allows us to remain at the forefront of the industry and provide our clients with excellent service and customer experience back by faith and reliable execution. Our steady third quarter performance is a result of their tireless efforts and I would like to thank them for their fostering our strong culture.
Particularly in public safety with a forecasted five 3% increase and health care at a projected 3% increase.
Data centers remain an active and high demand market due to shifts towards hybrid cloud environments, and increasing use of artificial intelligence and.
And forecast predict record growth in the market.
According to a report from Mckinsey <unk> Company released earlier this year.
<unk> for datacenter projects is forecast to grow by 10% year over year, reaching 35 Gigawatts by 2030.
More than doubling current consumption.
Kelly Huntington: Now Kelly will provide details on our third quarter of 2023 financial results. Thank you, Rex, and good morning everyone. Our third quarter of 2023 revenues, $939 million, a record high, which represents an increase of $140 million, or 17 percent compared to the same period last year. Our third quarter of T&D revenues were $549 million, a record high for our T&D segment, and an increase of 21 percent compared to the same period last year.
These encouraging forecast could generate growth for our business and we continue to leverage our expertise to place us in a leading position to win opportunities in these markets.
Our backlog of work remains steady in the C&I segment. Thanks to strong long term relationships with clients and our subsidiaries continued to see healthy bidding activity in key markets across North America.
Transportation projects remain underway in Colorado in Vancouver, as well as data center build outs and upgrades across our C&I business.
Sturgeon electric continues to execute pharmaceutical projects in Colorado, while closely monitoring opportunities for additional battery storage solar and electrical vehicle charging station projects.
Kelly Huntington: The breakdown of T&D revenues was $358 million for transmission and $191 million for distribution, both records. T&D segment revenues increased to higher revenue on transmission projects. Project, primarily related to higher revenue on scene energy projects. Work performed in your master service agreement continues to represent approximately 50% of our T&D revenues. CNI revenues were $391 million, a record high for our CNI segments, and an increase of 12 percent compared to the same period last year.
CSI electrical contractors in human electric continued to serve clients in the clean energy space executing both solar and energy storage work, while also seeing solid bidding opportunities for additional work in those markets.
Supply chain and material headwinds persist in the C&I segment, although we have seen some improvements in the second half of 'twenty. Three we continue to work closely with our vendors and clients to mitigate these challenges and best serve them with exceptional project delivery.
It is thanks to the tireless effort of our experienced and committed employees that we continue to overcome obstacles maintain a healthy pipeline of work and remain a trusted and agile partner for our valued customers.
Kelly Huntington: CNI revenues increased primarily due to higher revenue related to clean energy projects in certain geographical areas. Our growth margin was 9.8 percent for the third quarter of 2023 compared to 10.8 percent for the same period last year. The decrease in growth margins was primarily due to labor and project inefficiency, some of which were caused by supply chain destruction and inclement weather. Growth margin was also negatively impacted by rising costs associated with inflation.
I would like to thank all of our employees for their hard work and placing us in a position to succeed.
Thanks, everyone for your time today I will now turn the call back to Rick who will provide us with some closing comments.
Yes.
Thank you for those updates Kelly, Todd and done our third quarter 2023 performance illustrates the strength of our core markets, our ability to maintain and expand long term customer relationships and our ongoing commitment to strong operating principles and sound business strategy, we recognize the importance of adapting to market <unk>.
Kelly Huntington: These margin decreases were partially offset by favorable change orders and better than anticipated productivity on certain projects. G&D operating income margin was 6.6 percent for the third quarter of 2023 compared to 7.6 percent for the same period last year. The decrease was primarily due to labor and project inefficiencies, mainly related to clean energy projects, as well as inclement weather. These decreases were partially offset by better than anticipated productivity. CNI operating margin was 3.6 percent for the third quarter of 2023 compared to 3.1 percent for the same period last year.
<unk> and being an agile partner for our customers as we respond to industry changes. This is this is supported by our continued investment and development of our teams who.
It will enable us to maintain our status as an industry leader by the work they perform each day. Thank you to every employee for your dedication and invaluable contributions to the organization. It does not go unnoticed and finally I want to thank each of you for your continued support of MYR group, we look forward to progressing our business strategy.
<unk>, while emphasizing our.
Kelly Huntington: The increase was primarily due to labor and project inefficiencies and better than anticipated productivity on certain projects. These increases were partially offset by labor and project inefficiencies, some of which were caused by supply chain destruction and inclement weather. CNI operating income margin was also negatively impacted by rising costs associated with inflation. Third quarter of 2023 compared to 4.6 and increase of 1 million dollars compared to the same period last year. The increase was primarily due to higher employee incentive compensation costs and higher employee related expenses to support the growth in our operation.
Our client relationships and creating shareholder value operator, we are now ready to open the call up for comments and questions.
Thank you at this time, we will conduct a question and answer session. As a reminder to ask question you will need to press star one on your telephone and wait for your name to be announced to withdraw. Your question. Please press star one again and standby, while we compile our Q&A roster.
Okay.
Our first question comes from Justin Hauke of the Beer company. Please go ahead.
Yes, hi, good morning, everyone.
Kelly Huntington: Third quarter of 2023 interest expense was 1 million dollars and increased of $200,000 compared to the same period last year. The increase was primarily due to higher interest rates partially offset by lower average set balances during the third quarter of 2023 as compared to the same period last year. Third quarter of 2023 net income was $22 million compared to $18 million for the same period last year. Net income per deleted share of $1.28 increased 17 percent compared to $1.9 for the same period last year.
I guess good morning.
Good afternoon. Good morning, My first question here was.
You guys called out 130 basis point impact to gross margin from.
The estimate revisions on your on your fixed price contracts.
I guess I was just hoping to get a little bit more detail on that I mean was that primarily weather related is kind of a onetime thing for the quarter and then also maybe the split between the segments and how that fell through I would assume it's mostly in TB.
It was mostly in T&D and it was primarily on our solar side of the business the clean energy side.
Kelly Huntington: Third quarter of 2023 was $47 million compared to $40 million for the same period last year. Total backlog as of September 30, 2023 was $2.62 billion, 6 percent higher than a year ago. Title Backlog as of September 30th, 2023, consisted of $1.14 billion for our T&D segment and $1.48 billion for our CNI segment. Third quarter, 2023 offering cashflow with $13 million compared to operating cashflow of $14 million for the same period last year.
We had some weather impacts on projects we had some.
As Todd said in his script, some rising labor costs that affected us on a few projects and some design issues that we're working through so that was primarily where it was at the rest of the T&D performed.
Pretty well as expected.
Okay.
And then I guess, maybe a follow up to that is just just looking into <unk> typically seasonally <unk>. It is a higher margin more profitable quarter, but.
To your previous point it sounded like there were some kind of onetime things here, but.
If I look at the estimates that are out there for <unk>.
Kelly Huntington: Third quarter, 2023 free cashflow with negative $10 million compared to free cashflow of negative $4 million for the same period last year. With the decrease primarily due to higher capital expenditures to support our continued growth. Moving to liquidity in our balance sheet, we had $292 million of working capital, $62 million of funded debt, and $432 million in borrowing availability under our credit facility, as of September 30th, 2023. We have continued to maintain a strong funded debt to even leverage ratio of 0.33 times as of September 30th, 2023. We believe that our credit facility, strong balance sheet, and future cashflow from operations will enable us to meet our working capital needs, support the organic growth of our business, pursue acquisition, and opportunistically repurchase share.
EBIT and EBIT margins are materially higher than <unk>. So.
I guess I mean, just the tenure of maybe the margin contribution that you would you would see out there I mean is <unk> unusually light.
Maybe the better comparison for <unk> is kind of a year over year.
And I would look at it similar to probably where we were last year.
I wouldn't look at it.
Maybe where people are at today, we don't give guidance, but it seems like it's on.
Maybe high side, there when you compare it to where we're at especially when we talk about the impacts that we've had on some of our clean energy projects on the T&D side that those though we think it's stabilized those will continue to carry out lower margins for the next quarter or two as we finish up those projects.
But overall still a very good strong market, Okay, and then if I could just squeezing one for Kelly.
Todd Cooper: I'll now turn the call over to Todd Cooper, who will provide an overview of our transmission and distribution segment. Thanks, Kelly, and good morning, everyone. Our T&D segment, steady financial performance, the third quarter, demonstrates the strength of our long-term customer relationships and the reliability of our sound business principles. Our districts continue to maintain and expand strong financial relationships, while a healthy bid environment and strategic plans throughout our markets have produced a very nice backlog of work.
The unbilled receivables.
Balances kind of been increasing to the revenues.
Orders that are under negotiation.
Thats increased to just.
Just under $60 million here and it's been kind of steadily increasing in the last several quarters can you give any context as to.
What that's related to <unk>.
Maybe the timeline for resolution.
Hi.
Maybe a benefit to cash flow instead of working capital drag that you've been having.
Yeah sure happy to talk about that and.
Maybe just step back a little bit so part of this comes down to just the growth of our company and of course as our revenues grow.
Todd Cooper: As Rick mentioned, we're seeing significant investments in electrical infrastructure throughout North America, including many transmission upgrades, upstation expansions, and distribution-hardening programs. According to the 2023 North American transmission forecast recently released by the C-3 Group, the total electric transmission capital spent in 2022 was over $43 billion. And its forecast to grow as high as $67 billion in 2027. This investment is expected across the country with Texas and California. Do focus areas for NYR Group having the highest plan transmission capital expenditures.
Unbilled revenues will also be likely to grow in proportion to that a couple of other factors in our dsos.
<unk> have risen a bit from where we were at the end of last year, which was near record lows and a couple of things have contributed to that.
One is it.
Really project timing and I talked a little bit about this last quarter.
But as we have projects that are wrapping up we do start to build some balances related to contract with <unk> edge and you can see that in the quarter. We were up another 12% in contract routine edge versus the second quarter and so that is part of it. The other is I've talked about some of our mid to large sized that transmission and clean energy project.
Todd Cooper: The report also indicated that significant load growth driven by high-per-scale data centers is increasing the need for additional substation, infrastructure, and transmission interconnections around North America. Overall, the C-3 report stated that investor-owned utilities represent roughly 60 percent of the total U.S, electric transmission market, and it is considered the most stable and predictable of all sectors.
Can have some pretty favorable filling profiles that we start those projects and then the balance out as we wrap up and so that's also a bit of wet weather.
Positive for us in the fourth quarter of last year, and then in the second and third quarters has been at.
But if a drag as we look at Dsos I think the good news, though is that when you look at our dsos relative to our peers still in a pretty favorable position.
Todd Cooper: The need for new and upgraded electrical infrastructure has the potential to create future opportunities for our business. Our traditional P&D operations continue their strong execution of work throughout our operating Our Eastern Region was awarded multiple transmission line projects, as well as substation expansions and upgrades to the third quarter. Consider it, the Ellie Myers, how many extended several master service agreements in multiple districts and continues to bid others, while he has Louis and Harlem Electric executed three year MSA.
Of course, we do recognize that went in a higher interest rate environment. Our customers are just naturally likely to want to hang on to their their money till the last minute. When it's due and that may start to push more on payment terms that we of course, keeping a close watch on that.
But I think the good news is even even with.
Needing to have working capital to support our growing business.
We still ended the quarter with very minimal leverage position.
Okay Fair enough. Thank you I appreciate it.
Thanks Joseph.
Todd Cooper: In our Western Region, we continue to expand work with trusted long term clients, including a fast track storm damage transmission line repair project, in Texas by Great Southwestern Construction. Rising labor cost and project inefficiency, some weather related, and most notably in the solar market persisted across the segment. These, along with supply chain disruptions, impacted financial results for 23. While we see rising labor costs stabilizing, our strategic insight survey appliance conducted this year has shed some light on supply chain constraints our client space.
Thank you please standby.
And our next question comes from Brian Russo from Sidoti. Please go ahead.
Hi, good morning.
Morning, Brian.
If we could just focus on solar for a minute.
<unk> is facing that.
Industry has been well publicized.
Played mostly due to rising interest rates.
Higher cost of capital supply chain inflation.
Headwinds.
And I'm just curious.
Todd Cooper: To help mitigate supply chain constraints, our clients are expanding their roster of suppliers and working diligently with them to form better working relationships. MYR Group also continues to work in close collaboration with our robust network of vendors and our customers to help mitigate supply chain challenges and advance projects to successful completion. In summary, our TND segment remains committed to partnering with our valued customers. They fully provide excellent project delivery, a strengthening and expanding those relationships for mutually beneficial outcomes, and thank you to our talented employees for helping us reach our high quality standards every day. We are excited about the outlook of the TND industry and look forward to playing a key role in helping to meet the future demands of North America.
And I'm just curious what are you.
Hearing from your customers, whether it's on the C&I side or the T&D side.
Whether it's utilities independent power producers or third party developers.
What are you seeing.
In the market because you referenced solar several times.
Throughout your opening remarks.
Negatively impacting margins.
Yes, I think let's divide it into two things here I think when we're talking future work in the market, we still see it as a very strong market going forward, but it's one that we will continue to be very selective on as we pick up projects because of some of the impacts that you mentioned and we talked about in our script. So we continue to see those impacts and supply chain.
<unk> is an issue out there I mean materials tighter and tighter in that marketplace, because theres a lot going on worldwide in that market.
Don Egan: I will now turn the call over to Don Egan, who will provide an overview of our commercial industrial segment. Thanks Todd and good morning everyone. The third quarter saw steady performance in the CNI segment as we continue to strengthen and leverage strong relationships with our valued customers while professionally executing projects and strategically bidding opportunities in our chosen core markets. As Rick mentioned earlier, while overall commercial spending is forecasted for a slight slowdown going into 2024, there are positive signs of growth in our chosen markets such as data centers, healthcare, transportation and manufacturing.
<unk>.
Louis is a concern and we'll grow steady in that market like we are our other markets.
Continue to push that side, but very cautiously so I would say from a client standpoint.
They are bullish on what's going forward.
But again, we're going to be very selective going forward.
Okay, Great and then just on the backlog.
Not necessarily sequential trends, because I know start and stops of projects.
Right.
Jumping to stare, but when I look year over year.
T&D is still up double digits each.
Don Egan: The consensus construction forecast from the American Institute of Architecture released in July projects growth in industrial construction spending into 2024, particularly in public safety with a forecast of 5.3% increase and healthcare at a projected 3% increase. Data centers remain an active and high demand market due to shifts toward hybrid cloud environments and increasing use of artificial intelligence and forecast predict record growth in the market. According to a report from McKinsey & Company released earlier this year, demand for data center projects is forecasted to grow by 10% year over year, reaching 35 gigawatts by 2030, more than doubling current consumption.
Each quarter this year, but it looks like C&I.
Peaked up 12% in June year over year.
Two two.
The September quarter, which is up less than 2% versus September a year ago and I was just wondering if you could give us some more insight into that and does that tie in to your early comments.
Yes.
Seeing some commercial slowdown as we move into 2024.
I would say our markets are strong in what we're looking at again as we said before our backlog is always going to be lumpy.
We're not trying to sign a contract and get it forced into our backlog per quarter and so we can report something higher we want to make sure. We have the right contract in place and with high risk interest rates and some of the terms and conditions, we push for sometimes it takes a little longer to push a contract forward or for them to get their budgets approved.
Don Egan: These encouraging forecasts could generate growth for our business and we continue to leverage our expertise to place us in a leading position to win opportunities in these markets. Our backlog of work remains steady in the CNI segment thanks to strong long-term relationships with clients and our subsidiaries continue to see healthy bidding activity in key markets across North America. Transportation projects remain underway in Colorado and Vancouver, as well as data center buildouts and upgrades across our CNI business.
But from a visibility standpoint, very strong market out there going forward.
Okay, and then lastly, the operating cash flow of web relative to free cash flow. It looks like you are.
You have a free cash flow outflow.
For the first nine months of the year and I'm, just wondering I suppose that means we should see quite a meaningful improvement in free cash flow in the fourth quarter to kind of match generally your historical trends.
Don Egan: Sturgeon Electric continues to execute pharmaceutical projects in Colorado while closely monitoring opportunities for additional battery storage, solar, and electrical vehicle charging station projects. CSI electrical contractors in Hue and Electric continue to serve clients in the clean energy space, executing both solar and energy storage work while also seeing solid bidding opportunities for additional working of markets. Supply chain and material headwinds persist in the CNI segment. Although we have seen some improvements in the second half of 23, we continue to work closely with our vendors and clients to mitigate these challenges and best serve them with exceptional project delivery.
Sure I'll I'll address that one Brian so part of the negative free cash flow is the higher capex this year.
It's really aligns with the growth, we're having particularly on the T&D side of the business that is more asset intensive side of the business.
So we do expect that to be a way that will continue to support our growth is in <unk>.
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So that's one aspect the other is on operating cash flow and some of the dynamics I talked about in response to Justin's question, which really comes back to project timing being a big driver of that and we do expect the Ericsson at retain its balances that will bill and collect starting here in the fourth quarter, but some of that will also push into the first.
Don Egan: It thanks to the tireless effort of our experience and committed employees that we continue to overcome obstacles, maintain a healthy pipeline of work, and remain at trust in agile partner for our valued customers. I would like to thank all of our employees for their hard work and placing us in a position to succeed.
Part of next year. So we do expect that that will normalize over time, but it is a bit of an ebb and flow tying back to project timing.
Speaker: Thanks everyone for your time today.
Rick Schwartz: I will now turn the call back to Rick, who will provide us with some closing comments. Thank you for those updates, Kelly Todd and Don. Our third quarter, 2020 rate performance illustrates the strength of our core markets, our ability to maintain and expand long-term customer relationships, and our ongoing commitment to strong operating principles and sound business strategies. We recognize the importance of adapting to market conditions and being an agile partner for our customers as we respond to industry changes. This is supported by our continued investment and development of our teams, who enable us to maintain our status as the industry leader by the work they perform each day.
Okay. Okay, Great and then just lastly, you mentioned, Texas and California is big.
It's on the transmission side are you seeing any movement or increased activity.
With utility transmission projects tied to.
The MISO tranche one.
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Yes, I'll take that Rick Yes, we are actually we've been bidding a few of those projects over the past year.
And.
There is three of them out right now and we're seeing more in the future. So that activity is picking up.
And.
Right now like I said were.
Rick Schwartz: Thank you to every employee for your dedication and invaluable contributions to the organization. It does not go unnoticed.
We're pretty optimistic about about where we stand and our capabilities in that or align pretty well with the with a lot of those clients who are existing MSA partners. So that activity is picking up.
Rick Schwartz: And finally, I want to thank each of you for your continued support of M.Y.R. Group. We look forward to progressing our business strategies while emphasizing our client relationships and creating shareholder value.
I think I've mentioned in the past Brian but.
We're going to back kind of spread out evenly from 2024 through 2029 on the construction side of things.
Operator: Operator, we are now ready to open the call-up, the comments, and questions. Thank you.
Operator: At this time, we will conduct a question and answer session. As a reminder to ask questions, you will need to press Star 1-1 on your telephone and wait for your name to be announced. To withdraw your questions, please press Star 1-1 again and stand by while we compile our Q&A roster.
Okay, great. Thank you very much.
Thanks, Brian.
Thank you please standby.
As a reminder to ask a question you will need to press star one on your telephone.
Justin Hauke: Our first question comes from Justin Hawke of the Beard Company. Please go ahead. Hi, good morning, everyone. My first question here was You guys called out 130 basis point impact to gross margin from estimate revisions on the fixed price contracts. I guess I was just hoping to get a little bit more detail on that. I mean, was that primarily weather related as kind of a one time thing for the, for the quarter, and then also maybe the split between the segments, how that that delta route, I would assume it's mostly in TND.
Okay.
Yes.
Okay.
I'm showing no further questions at this time I would now like to turn the call back to Rick Swartz, President and Chief Executive Officer of the MYR Group. Please go ahead.
To conclude on behalf of Kelly talk Dan and myself I sincerely. Thank you for joining us on the call today I don't have anything further and we look forward to working with you going forward and speaking with you again on our next conference call until then stay safe.
Justin Hauke: It was mostly in TND and it was primarily on our solar side of the business, the clean energy side where we had some weather impacts on projects we had some, you know, it's taught that in his script, some rising labor costs that affected us on a few projects and some design issues that we're working through.
Thank you for your participation in today's conference. This does conclude the program you may now disconnect.
Yeah.
Okay.
Rick Schwartz: So that was primarily where was at the rest of the TND performed pretty well as expected. Okay, and then I guess maybe a follow up to that is just just looking into 4Q and typically seasonally 3Q is a higher margin or a profitable quarter, but, you know, to your previous point, it sounds like there were some kind of one time things here. But, you know, if I look at the estimates that are out there for 4Q, the EBIT, EBITDA margins are materially higher than 3Q.
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Rick Schwartz: So I guess, I mean, just the tenor of maybe the margin contribution that you would, you would see out there, I mean, it's 3Q can usually light and maybe the better comparison for 4Q is kind of year over year. Yeah, I would look at it similar to probably where we were last year. I wouldn't look at it, you know, maybe where people are at today. We don't give guidance, but it seems like it's on maybe high side there when you compare it to where we're at, especially when we talk about the impact that we've had on some of our clean energy projects on the TND side that those, though we think it's stabilized, those will continue to carry out lower margins for the next quarter or two as we finish up those projects.
Kelly Huntington: But overall, still a good strong market. Okay. And then if I could just squeeze in one more for Kelly, the, the unbilled receivables, balance has kind of been increasing for the revenues on quarters that are under negotiations. So that, that's increased, it's just under 60 million here and it's been kind of steadily increasing the last several quarters. Can you give any context of what that's related to and maybe the timeline for resolution and, you know, maybe it benefits a cash flow instead of the working capital drag you've been having.
Kelly Huntington: Yeah, sure. Happy to talk about that and maybe just to back up a little bit. So part of this comes down to just the growth of our company. So of course, our revenues grow, unbilled revenues will also be likely to grow and in some proportion to that. A couple of other other factors, you know, our DSO have risen a bit from where we were at the end of last year, which was near record lows.
Kelly Huntington: And a couple things have contributed to that. So one is really project timing and I talked a little bit about this last quarter. But as we have projects that are wrapping up, we do start to build some balance related to country. Contract Retainage, and you can see that in the quarter. We were up another 12% in Contract Retainage versus the second quarter, so that is part of it. The other is I talked about some of our mid- to large size transmission and clean energy projects.
Kelly Huntington: Can have some pretty favorable filling profiles if we start those projects, and then those balance out as we wrap up. And so that's also a bit of what was positive for us in the fourth quarter of last year, and then in the second and third quarters has been a bit of a drag as we look at DSOs. I think the good news though is that when you look at our DSOs relative to our peers, still in a pretty favorable position, and of course we do recognize though in a higher interest rate environment.
Kelly Huntington: Our customers are just naturally likely to want to hang on to their money to the last minute when it's due and they start to push more on payment terms. So we of course keep a close watch on that. But I think the good news is even with needing to have working capital to support our growing business, you know, we still ended the quarter in a very minimal leverage position. Okay, I'm fair enough that thank you all for my appreciate it. Thanks, Justin. Thank you. Please stand by.
Brian Russo: And our next question comes from Brian Russo from Sedotti. Please go ahead. Yeah, good morning. Morning, Brian.
Brian Russo: We could just focus on solar for a minute. You know, the challenge is facing that industry has been well publicized as a plate. You know, most of the rising interest rates are across the capital supply chain inflation. You know, headwinds. And I'm just curious, you know, and I'm just curious, what are you, you know, hearing, you know, or from your customers, you know, whether it's on the CNI side or the T&D side, you know, whether it's utilities or independent power producers or third party developers. You know, what are you seeing, you know, in the market because you reference solar several times throughout your opening remarks, you know, as, you know, negatively impacting margins.
Rick Schwartz: Yeah, I think let's divide it into two things here. I think when we're talking future work in the market, you still see it as a very strong market going forward. But it's one that will continue to be very selective on as we pick up projects because of some of the impacts that that you mentioned and we talked about in our script. So we continue to see those impacts and supply chain is an issue out there.
Rick Schwartz: I mean, materials tighter and tighter in that marketplace because there's a lot going on worldwide in that market. Labor is, you know, always a concern and will grow steady in that market like we are our other markets and continue push that side, but very cautiously. So I would say from a client's standpoint, they're bullish on what's going forward. But again, we're going to be very selective going forward.
Speaker: Okay, great.
Rick Schwartz: And then just on the backlog, not necessarily sequential trends because I know, you know, starting to stop some projects, it could create some lumpiness there. But when I look year over year, T&D, you know, it's still up double digits, you know, each quarter this year. But it looks like CNI, you know, peaked up 12% in June, year over year to, you know, to the September quarter, which is up less than 2% versus September a year ago.
Rick Schwartz: And I just wonder if you can give some more insight into that. And is that kind to your early comments of, you know, seeing some commercial slowdown as we move into 2024? I would say our markets are strong in what we're looking at. Again, as we said before, our backlog is always going to be lumpy. We're not trying to sign a contract and get it forced into our backlog for quarter end so we can report something higher.
Rick Schwartz: We want to make sure we have the right contract in place and with higher interest rates and some of the terms and conditions we push for. Sometimes it takes a little longer to push a contract forward or for them to get their budgets approved. But from a visibility standpoint, very strong market out there going forward.
Speaker: Okay.
Kelly Huntington: And then lastly, the operating cash flow went relative to free cash flow. It looks like you're. You have a free cash flow for the first nine months of the year. And I'm just wondering, I suppose that means we should see quite a meaningful improvement in free cash flow in the fourth quarter to, you know, kind of match general. Generally, your historical trends.
Kelly Huntington: Sure, I'll address that one. Brian, so you know, part of the negative free cash flow is the higher capEx this year, which really aligns with the growth we're having, particularly on the TND side of the business. That is the more asset and sense inside of the business, so we do expect that to be a way that will continue to support our growth is investing in fleet and equipment. So that's one aspect.
Kelly Huntington: The other is on operating cash flow and some of the dynamics I talked about in response to Justin's question, which really comes back to project timing being a big driver of that. So we do expect there are some retainage balances that will build and collect starting here in the fourth quarter, but some of that will also push into the first part of next year. So, you know, we do expect that that will normalize over time, but it is a bit of an ebb and flow tying back to project timing.
Speaker: Okay, great.
Rick Schwartz: And then just lastly, you mentioned Texas and California as big markets on the transmission side. Are you seeing any movements or increased activity with utility transmission process tied to. The MISO crunch one projects. Yeah, okay, that Rick. Yeah, we are actually we've been bidding a few of those projects over the past year, and there's three of them out right now, and we're seeing more in the future, so that activity is picking up.
Rick Schwartz: And, you know, right now, like I said, we're pretty optimistic about about where we stand and our capabilities and that are aligned pretty well with with a lot of those clients who are existing in that state partner, so that activity is picking up. And I think I've mentioned in the past Brian that we're going to back kind of spread out evenly from 2024 through 2029 on the construction side of things.
Speaker: Okay, great.
Speaker: Thank you very much. Thanks, Brian.
Operator: Thank you, please stand by. And again, as a reminder, to ask a question, you will need to press starboard one on your telephone.
Operator: Okay. I'm showing no further questions at this time.
Rick Schwartz: I would now like to turn the call back to Rick Swartz, President and Chief Executive Officer of the MYR Group. Please go ahead. To conclude, on behalf of Kelly, Tod, Don and myself, I sincerely thank you for joining us on the call today. I don't have anything further, and we look forward to working with you going forward and speaking with you again on our next conference call. Until then, stay safe. Thank you for your participation in today's conference. This does conclude the program. You may now disconnect. Thank you very much.