Q3 2023 Tutor Perini Corp Earnings Call
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Good day, ladies and gentlemen, and welcome to the tutor Perini Corporation third quarter 2023 earnings Conference call. My name is John and I'll be your coordinator for today. All participants are currently in a listen only mode. Following management's prepared remarks, we will be opening the call for a question and answer session.
A reminder, this conference call is being recorded for replay purposes if.
If anyone should require operator assistance during the conference. Please press Star zero.
And I will now turn the conference over to your host for today, Mr. Jorge Casado, Vice President of Investor Relations. Thank you. Please proceed.
Hello, everyone and thank you for joining us today with US are Ronald tutor, Chairman and CEO, and Gary Smalley Executive Vice President and CFO.
Before we discuss our results I will remind everyone that during today's call, we'll be making forward looking statements, which are based on management's current assessment of existing trends and information.
There is an inherent risk that our actual results could differ materially you can find our disclosures about risk factors that could potentially contribute to such differences in our Form 10-Q, which we're filing today and in our most recent Form 10-K, which we filed on March 15th 2023.
The company assumes no obligation to update forward looking statements, whether due to new information future events or otherwise other than as required by law. Thank you and I will now turn the call over to Ronald tutor.
You are hey, and thank you all for joining us.
We delivered mixed results for the third quarter of 2023 with very strong cash generation.
Year over year backlog growth, but with challenge earnings due to a number of write downs that resulted from the resolution of <unk>.
Areas disputed matters.
We generated 103 million of operating cash in the quarter, bringing our year to date trading cash flow to 181 million.
Which is just 26 million short of the full year record of 207 million that we achieved last year.
Both our third quarter and year to date operating cash flows were the second highest result for each respective period of many years since the 2008 merger between tutors to leave then Perini Corporation.
Our consolidated revenue was level compared to the same quarter last year with increased contributions from the building and civil segments.
Set by lower revenue in the specialty contractors segment.
There's certain projects in the north east that had been completed or are very nearly complete.
We expect revenue growth in the fourth quarter compared to the fourth quarter of last year with better revenue growth next year and even stronger growth in 2025, as we should be entering the construction phase of multiple large projects starting in 2024.
We have made continue we see it continuing and significant progress on various claims and dispute settlements and expect to continue resolving the baskets of long standing disputes and collecting significant amounts of related cash over the.
Next 12 months.
We expect there to be a very limited number of outstanding disputes at the end at the end of 2024, all of which should be resolved in the first two quarters of 2025.
Considering our near record cash flow through the third quarter is very <unk> as well as very strong co actions, thus far in the fourth quarter related to the resolution.
A disputed items were confident that our cash flow for 2023 will significantly exceed the record 207 million, we generated last year.
We are also optimistic that 2024 will even be a stronger year than 2023, and the resolve and generation of cash.
We plan to use the excess cash generated between now and next spring did they delever our balance sheet as part of a planned refinancing early next year for the past several months, we have been closely monitoring the markets and discussing various strategic refinance.
Alternatives with our advisors and have developed a plan that will soon embark upon that we expect will result in a timely refinancing of our debt in light of this springing maturities.
But we believe that mark the market concerns regarding those maturities and our ability to re finance have been a significant headwind in the valuations of both our equity and debt. So we look forward to concluding that refinancing to eliminate that valuation in Panama.
Our third quarter backlog was 10.6 billion steady compared to the second quarter of 'twenty, three and up 28% compared to the 8.4 billion for the same quarter last year.
The strong year over year backlog growth was largely driven by our second quarter Award of the 2.95 billion dollar Brooklyn jail Progressive design build project.
The most significant other new awards and contract adjustments in the third quarter of 2023 include.
They include 115 million of additional funding for healthcare project in California.
95 million and $81 million of additional funding for two different mass transit projects in.
California, the $47 million, New Everglades National Park Visitors Center project in Florida, and a $42 million mining project in Virginia.
As well as the Central district wastewater treatment plant electrical at Florida valued at more than 40 million from an earnings perspective, good contributions in the third quarter from our civil segment.
Were offset by continuing challenges predominantly in our specialty contractors segment in New York.
Gary will discuss these in a moment overall, we reported a consolidated pretax loss of $26 million and ended the third quarter with a loss of 71 cents per diluted share after adjusting for Noncontrolling interest.
Our bidding pipeline continues to be very active and filled with various large project opportunities. We have been and will continue to be highly selective and Stuart Childers and projects, we pursue and execute as well as under what contractual terms.
Our most significant not significant opportunities include depending queens jail facility.
Progressive design build project similar to Brooklyn asset and made it to be in excess of $30 million for which we have already submitted our initial proposal.
Awaiting an owner's selection decision most probably in January.
Last week, we did the $500 million RFK bridge retrofit and rehabilitation project in New York in between now and the end of this year, we will bid for other projects, namely the billion dollar Frederick Douglass tunneling project can bear in Maryland, the eight.
$100 million Amtrak East River Tuttle rehab project in New York.
$200 million long Snick long slip Canal rail enhancement project in New Jersey.
And the $225 million M D. Four at Suitland Park interchange in Maryland.
We expect decisions in these by the end of the year or in early 'twenty. Four we are also an anticipated decision by either the end of this year. The first quarter next year on frontier Kemper's bid for the $500 million Great Lakes Tunnel project.
In addition, we're currently preparing to bid.
With O N G industries aren't Connecticut partner that $500 million Amtrak, Connecticut River Bridge replacement in January next year.
Other large near term opportunities include the $1 5 million billion dollar Inglewood automated people mover project in Southern California.
The $2 billion Honolulu Rail Transit project, which is still expected to bid in the spring of 2024 and as a reminder, we had originally been the low bidder back in 2020.
And two sections of the Hudson River Tunnel project, the $750 million Manhattan Tunnel in New York is a $500 million Palisades tunnel in New Jersey.
Finally in the spring of 2024, we plan to propose on the 2.6 billion dollar D. T X <unk> Transit Center project.
In San Francisco than in the summer, but $1.5 billion Newark.
Air train design build project, which we were originally low bidder last year and was rejected as being over budget and later next year. The $1 6 billion dollar Amtrak soft tooth bridges replacement project in New Jersey.
As competition as I've said time and again is diminished we are confident that we win our share of these projects and drilling you can grow our backlog substantially over the next 12 to 18 months.
As you can tell from this bidding pipeline there continues to be very strong demand for our services and we expect that demand to increase I think in chrome metal funding from the bipartisan bipartisan infrastructure law continues to flow to our public.
Owners over the next several years.
We expect improved performance in our <unk>.
Fourth quarter of 2023 and next year.
We are still not providing new guidance for 2023 24.
'twenty three.
This year, we haven't well we are still not excuse me, providing new guidance for 2023, but plan to provide our initial EPS for 2024, when we issue fourth quarter and full 2023 zones.
With that I'll turn the.
Call over to Gary Smalley to review the financial results.
Thank you Ron and good afternoon, everyone.
I will begin with the discussion of results for the third quarter, including cash flow followed by some commentary on our balance sheet than some modeling assumptions.
As Ron indicated we generated a very strong $102 million of operating cash in the third quarter of 2023.
And $181 million for the first nine months of 2023, both of which were the second best result for each respective period of any year since 2008 merger and only trailing last year's operating cash performance for the equivalent periods.
Our strong operating cash flow has been driven by overall solid collection activities, including collections related to various settlements in dispute resolutions that we concluded earlier in the year.
Because of the favorable outlook for continued strong cash generation over the next several quarters as Ron mentioned.
Much of it associated with expected further settlements and dispute resolutions. We are confident that we will conclude this year with significantly stronger operating cash flow compared to the record $207 million that we reported last year and we intend to use excess cash generated over the next several months.
To deleverage our balance sheet as part of a successful refinancing.
In fact, our continued strong operating cash flow in the first part of the fourth quarter.
Has allowed us to begin accumulating cash that we are earmarking for refinancing.
We have to date set aside more than $70 million for this purpose again.
From fourth quarter collections and to be clear. This is incremental to any required annual excess cash flow prepayment related to our term loan b.
We are focused on our debt maturities and have been taking a holistic approach that considers a broad range of alternatives.
Bridging both our management and board of directors experience in evaluating our refinancing options.
Soon we will begin the actual refinancing process.
Revenue for the third quarter of 2023 was $1.06 billion level compared to the same period in 2022.
Civil segment revenue was $520 million.
Modestly compared to the third quarter of last year.
Building segment revenue was 365 million up 15%, primarily due to increased project execution activities on various projects in California with substantial scope of work remaining in specialty.
Contractors revenue.
Revenue was $175 million down 31% year over year due in part to decreased activities on the electrical and mechanical components of a transportation project in the northeast that is nearing completion.
Overall, we reported a loss from construction operations of $13 million for the third quarter of 2023 compared to a $7 million loss from construction operations for the same quarter of last year.
Our results for both periods were negatively impacted by net unfavorable adjustments on various projects primarily due to changes in estimates, resulting from negotiations settlements and legal judgments on certain disputed claims and unapproved change orders.
The more recent negotiations and settlements have resulted and will continue to result in additional operating cash in the fourth quarter and future periods.
Civil segment income from construction operations was $47 million more than double compared to $23 million.
Reported in the third quarter of 2022.
Increase was primarily due to the absence of a couple of prior year unfavorable adjustments as well as an improved project mix in the current year period, including contributions from higher volume on a mass transit project in California.
In addition, during the third quarter of 2023.
We reached a settlement that impacted multiple components of the different mass transit projects in California, which included the resolution of certain ongoing disputes increase the expected profit from work to be performed in the future.
The settlement resulted in an unfavorable noncash adjustment of $23 million to one component of the project.
Near incompletion, partially offset by a favorable adjustment.
$9 million on another component of the project that has substantial scope of work remaining.
As a result of the settlement.
Unfavorable impact to the period from these two adjustments is expected to be more than offset by the increased profit generation from future work on the project.
This settlement should have a favorable impact on cash generation in future quarters as well.
The building segment reported essentially breakeven income from construction operations for the third quarter, both 2023 and 2022.
Especially contractor segment posted a loss from construction operations of 38 million for the third quarter of 2023 compared to loss of $12 million in the same quarter of last year.
The change was principally due to the impact of $17 million of unfavorable noncash adjustments related to changes in estimates on the electrical mechanical scope with the transportation project in the northeast due to changes in the expected recovery on certain unapproved change orders, resulting from ongoing negotiations.
As well as the $9 million unfavorable adjustment that resulted from ongoing negotiations and an anticipated settlement uncompleted mass transit project in California.
We are certainly disappointed with continued charges we've had in the specialty contractors segment, but are anticipating improved performance in the fourth quarter as well as in 'twenty 'twenty four from both the specialty contractors and building segments.
Corporate G&A expense for the third quarter of 2023 was $21 million compared to $17 million for the same quarter of last year.
Other income for the third quarter of 2023 was $3 million compared to approximately $400000 in the third quarter of 2022.
Interest expense was $20 million compared to $17 million from the same quarter of last year with the increase driven by higher borrowing rates. This year on our revolver and the term loan b.
Net loss attributable to tutor perini for the fourth quarter excuse me for the third quarter of 2023.
Well, it's $37 million or a loss of 71 cents per share compared to a net loss attributable to tutor perini of $32 million or a loss of 63 cents per share in the third quarter of last year.
[noise] underperformance in both periods.
It's due to the reasons I mentioned earlier.
As for our balance sheet, our net debt as of September 30th 2023 was $615 million down $84 million or 12% compared to a net debt of $699 million at December 31, 2022.
As of September 32023 were in compliance with the covenants under our credit agreement and we expect to continue to be in compliance in the future.
Debt reduction remains our top near term focus for the use of cash.
As mentioned earlier, we expect continued significant cash collections much of it will be associated with anticipated resolutions of various disputes.
And expect to use excess cash generated over the next several months to deleverage as part of a successful refinancing.
Lastly, I will provide some updated assumptions for modeling purposes.
G&A expense for 2023 is now expected to be between 250 and $255 million.
Depreciation and amortization the amortization expense is now anticipated to be approximately $46 million in 2023 with depreciation at 44 million and amortization at $2 million.
Interest expense is still expected to be approximately $84 million of which about $4 million will be noncash.
Our effective income tax rate for 2023 is now expected to be approximately 35% to 40%. We now expect noncontrolling interest to be between 40 and $45 million.
We continue to forecast 52 million weighted average diluted shares outstanding for 2023, and lastly, our capital expenditures are now expected to be approximately $56 million for 2023.
Hi, Gary.
To summarize the quarter, we had very strong strong operating cash flow and year over year backlog growth in the third quarter.
But earnings were negatively impacted by certain charges due to the resolution of disputed matters. It goes back as long as eight nine years ago.
We intend to anticipate that our full year operating cash flow for 2023 will significantly exceed last year's record result, as we continue to resolve in saddle disputed matters.
Collectors substantial cash associated with those disputes.
We believe strongly that our operating cash performance in 2024 will be significantly in excess of the record in 2023 as virtually all but a handful of issues claims and disputes will be resolved in 2020.
Four.
Our backlogs should grow significantly next year as we are awaiting pending decisions on major project bids already submitted and our bidding pipeline remains very strong with solid end market demand for numerous major projects.
We anticipate improved performance in the fourth quarter and significantly improved EPS next year and beyond.
The reality is between the pandemic and all the disputes all the delays with association that accumulated the level of cost in excess are being resolved by the end of next year and some 50 odd disputes in 2021.
We'll be down to five or less in 2025.
Thank you and with that I will turn the call over to the operator for any questions.
Thank you Sir we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue. You May press star two to remove your question from the queue for any participants using speaker equipment. It may be necessary to pick up your handset before pressing the sarkies warmer.
While we poll for questions.
Got it cool.
And the first question comes from the line of Steven Fisher with UBS. Please proceed with your question.
Hey, Thanks, good afternoon.
I just wanted to sort out the underlying operations from the charges related to settlements.
Which segments were the charges on projects that are ongoing and what were those scary.
Yes, Steve that there was a mix of projects that are ongoing but we did have some in civil that were ongoing but they are the one project there that had the $23 million that I mentioned, it's winding up and and really so it's ongoing but we will say barely and then.
Most of the charges that we're talking about though are for projects that are really complete.
That charge was the tunnel project in Los Angeles.
That is completed.
Okay.
Thank you for that.
And then as we think about the cadence and the clarity that you have from 2024.
You mentioned.
An expectation of giving guidance for 2024 on the next call.
Is there still a lot of work in terms of the settlements that could.
D cleaned up in the first half of the year when actually it sounds like a lot of this is going to be going on through even the first half of 'twenty five so.
I'm curious about what's going to be different compared to the last couple of quarters that will kind of make it a clear enough environment to be able to offer guidance, even if they're still going to be.
A number of things moving in and out.
Well, let me try and explain it to the limits that I can.
2022 was a strong cash flow year 2023, as I pointed out will be significantly in excess of that and I also pointed out 24 larger than 'twenty three in essence by the end of 'twenty three excuse me by the end of 'twenty four we won't have.
Five outstanding claims to resolve it'll all be in the first two quarters. The largest one is an insurance claim on as our 99 against the carriers that as insurance companies. All do if any of you are listening you collect premiums install payments until the last moment you can.
So virtually the balance of our Cie save a small portion will be concluded next year and that's why we believe the cash flow will be so significant.
And we have not been increasing or adding claims to the mix for every 10, we saddle we might add want so I'm very pleased that that phase is behind us and were cleaned up and is in the cash will follow as it already is we're also looking at the significant amount of work.
To add already a large backlog so.
We're feeling very positive, but the last thing that remains to put the past behind us.
Just saddle up or litigate to conclusion in the balance of our claims because we are not hesitant to litigate, let a judge decide and we've had a number of those and they've been positive and we've got a couple of more will get judicial decisions within the next three to six months. So the main thing is.
That's C I E will be.
Very limited by the end of 2024 and as such you will see cash generation in accordance with it. So it's very positive from my from my perspective, given I negotiate every one of them and.
Steve from an EPS guidance standpoint, because that part of your question.
There's going to be some volatility and we think there's going to be some upward volatility to there's some.
Cases that were waiting on judgment, so that will be tried that we think we're well poised to exceed what our book position is so yes, there could be some volatility that's not going to keep us from coming out with guidance and and we hope with the puts and takes to what.
What happens with settlements and judgments in arbitration results. We we hope that that will hit the guidance are pretty close, but but there's going to be volatility.
Okay.
And then just claims behind us there'll be a certain volatility attached which by the end of 'twenty four for all intents and purposes that'll be behind us.
Okay, and then just a couple last ones.
In terms of obviously, the Q3 cash flow operating cash flow was pretty solid so I just I'm curious for Q4.
Your sense that the.
The operating cash flow will be more or less than that of Q3, and then can you give us a sense of the margins that you have in backhaul. We I'm told we can't tell you that I did tell you to be significant and will exceed the record of last year, but.
As much as I wanted to tell you what I thought it'd be I was told that I could hey, Steve where we don't even have results of operating cash for October yet we will get those in next few days and to predict.
We've had great collections as Ron and I both mentioned.
But we just can't we just can't provide it yet.
Okay, and then could you just give us a sense of the margins that you have in backlog.
If you can by segment that would be helpful. Just trying to get a sense of normalization here.
We can't tell you margins by backlog that's a competitive.
Item and.
Well I think we've never said in the past March I think he's looking at segment specific project segment I even segment operation goes that's so variable because we have very.
What are you looking forward, Steve what each segment should make after G&A pretax.
Yeah, Brian just trying to get a sense of.
The margins have been influenced a lot by these settlements come.
Coming in and out over the last several quarters.
Presumably the work that you're putting in backlog today.
Lend itself to some more normalization of our.
Results there just kind of curious I know historically, you've had low double digit margin potential in civil is that kind of what we should expect from that business. You know you've got a pretty equal size backlog and in the.
The building segment.
And that could be very different profitability, if we're talking about a 1% versus and maybe there's more.
You know fixed work in there because of the prison project, maybe it's more towards a mid single.
And when does the specialty business and to get back on track with.
That's sort of the low to mid single digit margins that you're kind of targeting for a while.
The question I would I would tell you that.
If I gave you a range of civil it'd be conservative it 10 to 12 after all civil G&A subject to corporate.
I think that the building business as it ramps up in particular with the prison job award will continue to be in the 2% to 3% with the president and having a very positive upward impact on that two to three as the revenue progress is that good easily be significantly higher than <unk>.
Won't be lower and the specialty group should be operating at 5% to 6%, but as you can as you're aware our two new York specialty companies have been nothing but struggling for the last four to five years, even with all the management replacements and restructuring now.
Now we have reduced our specialty groups operations in New York are only working for tutor Perini and I'd say their specialty revenues are 25% of what they were three and four years ago. So either then resolve of past disputes I don't see any negative.
Operating results starting in 2024 going forward. So I think the specialty group controlled as it is in New York.
We will limit our exposure and generate a fairly stabilized margin in the 4% to 5% category working only for tutor perini. So the issues of litigations, where their general contractors are owners well.
Hopefully disappear.
So I think that's a safe way to put it I think civil still has significant upside to what I quoted in the building business should be significantly upgraded by virtue of the lump sum bids in New York I might add black construction continues to grow and do extraordinarily well.
As does London in the Midwest So.
Everything is going extremely well going forward that concerns still remains our New York City specialty contractors, and what we do to reduce their impact and reduce our risks associated with our operations.
Yes.
That's very helpful. Thank you Rob.
And the next question comes from Abe Landa from Bofa. Please proceed with your question.
Good afternoon, and thank you for taking my question.
I think I saw the 8-K earlier, just kind of going off of your recent comments.
I believe an executive that worked at the New York City specialty it received a bonus could you maybe just.
Okay.
I think students strong performance can you just give us an update on how those settlements and kind of related discussions are going and what we should kind of expect I don't even know.
Cut me off I don't even know what you just said could you repeat that so I can understand it.
Yes, I think you've put out an 8-K, maybe a few months back.
For our bonuses paid for an executive.
That was in charge of managing your New York, especially contractor business and I kind of just wanted an update on how.
The dispute settlement was progressing.
And kind of when you kind of think of the cadence of that settlement.
What do you mean that settlement are you signaling some.
First of all Jack sorry.
Settlements.
Ah yes.
I think maybe the confusion is the incentive that you're referring to was not paid for progress in it. It was really based on his other portfolio assignments prior to him taking over for specialty yes, yes.
Youre talking about gets on our cards bonus that had really nothing to do with the specialty group. He just so kind of that role.
And it was for past performance that was extraordinary so not to confuse one where the other he is now in charge of both building and specialty and will be tied accordingly, and by the way. If you were asking when do you think will be out of these specialty group claims in New York.
Say unequivocally by the end of 2024.
Thank you for clarifying that and yes, I was ultimately.
Trying to get to when these set of optics et cetera, what's kind of got it reversed.
But let's put it this way all our owners can't stall us anymore. They either got court dates are we got judgments they've run out of appeals, they're gonna have to pay and one by one they are.
That's good to hear.
And we've also.
So on your last call you may have mentioned that there was.
I think in November three panel arbitration as well that was you were kind of expecting some more color on is there an update.
Yeah, we we concluded our arbitration against the California D O T on the Shasta Bridge project.
That was concluded in November this year, we expect the decision subject input in April or May next year. They originally said March our hearts, just got clarity that it won't be until April or may, but that will conclude that litigation, which is in the range of 100 million.
Yes.
Okay. So we shouldn't we should get like a final.
Judgment, let's say in April 24.
Around April or May, yes, 24, and without a question.
Great. Thank you very much and then it's also good to kind of talking about your capital structure.
Free cash flow generation, how you are kind of setting some.
Money aside.
Do you have a target timeframe of when.
Youre going to come to the market to kind of do a refinancing and do you have a target that's that number as well.
Yeah, no we're not going to talk any more specifics than what we said look we are we said that we're soon ready to launch we're looking at different alternatives and we'll be doing different things will say simultaneously so based.
Based on when we would close we would say you know sometime early part of the year.
And as far as net debt or a debt target.
Look it depends on the pace of cash we should be able to get our debt down significantly based on what we foresee as cash collections and the.
And we'll see how that works, but it will be significant reduction of debt is what we're looking at absolutely we will significantly reduce the debt load that we're carrying right now and.
You will see in time, but look at the cash flow. We generated for 2023 is still going strong and what's coming in 'twenty four but first space. We're gonna funnel that cash flow is to significantly reduce debt in this crazy market place.
That's great to hear and maybe just building off that is there.
Maybe a leverage that you've kind of feel more comfortable operating that kind of a go forward basis kind of once you generate all this free cash on recent apps.
Yes, absolutely do but I'm not supposed to tell you I guess, it's one of the many things.
I believe we will achieve the amount of debt structured in a way that I'm comfortable even with these awful interest rates and I think we will reach that point between April and June of next year and again I'll reiterate what Gary said significantly reduce total amount of debt which is.
Appropriate and if you look at the Cie in the casual and you begin to generate an AD this year to next year.
What better place to put it in reducing high interest debt.
Okay.
That's great color. Thank you very much for answering my questions. This afternoon.
There are no further questions at this time I would like to turn the floor back over to Ron for any closing comments.
No I have nothing more to add thank you everyone for joining us and stay patient we're getting there.
And this concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.
Okay.
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