PLH Group, Inc. (PRIM) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the Primoris Services Corporation Conference Call. [Operator Instructions]. Please also note, today's event is being recorded. At this time, I'd like to turn the floor over to Jeremy Apple, Managing Director with Clermont Partners. Please go ahead.

Thank you, operator, and good morning, everyone. We would like to welcome all of you today to today's call to discuss Primoris' acquisition of PLH Group. Joining me today are Tom McCormick, President and Chief Executive Officer; and Ken Dodgen, Chief Financial Officer. Before we begin, I would 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. Our forward-looking statements represent our outlook only as of today. We disclaim any obligation to update these statements, except as may be required by law. I would now like to turn the call over to Tom McCormick. Tom?

Thank you, Jeremy. Good morning, and thank you for joining us. For the past 4 years, Primoris has been executing a strategy of shifting our business portfolio to gain more exposure to the faster-growing, higher-margin segments of specialty contracting. You've seen us move into utility scale solar construction. You've seen us move into broadband communications with the acquisition of Future Infrastructure Holdings. And now we are continuing to expand our exposure to electrical power delivery and gas utilities with the acquisition of PLH Group. Power delivery, which encompasses electrical transmission and distribution in adjacent markets is the key strategic focus for us as the U.S. rapidly transitions to greater dependence on electric power generated by traditional and renewable sources. Our acquisition of PLH Group is another step along that journey that further enhances the size and scale of our operations in both power delivery and gas utilities. This transaction nearly doubles our electric power delivery business and brings our total utility segment, including communications and gas utility, to more than 50% of our pro forma revenue. It also expands our skilled labor base, strengthens our presence in high-growth regions and enlarges our percentage recurring revenue under master service agreements, while accelerating our transition towards higher growth, higher margin markets. I'll now move to Slide 3. Primoris is paying an all-cash purchase price of $470 million, funded with new debt. This represents a very attractive multiple of 7.3x based on PLH's last 12 months EBITDA and anticipated savings from synergies. These cost synergies primarily include overhead, facilities, equipment rental and shared services. We were able to secure this compelling valuation, largely due to the strong fit between PLH and Primoris as the addition of PLH will create substantial growth opportunities which have made the PLH teams excited to work with us. PLH's strong EBITDA generation is expected to quickly make this acquisition accretive to our earnings with an anticipated double-digit earnings per share accretion in the first 12 months after the close of the transaction. Pro forma for the transaction, our company's net leverage will be approximately 3.3x net debt over the last 12 month's pro forma adjusted EBITDA, and we expect to delever the ratio back under 2x over the next 2 years. The transaction is expected to be completed in the third quarter this year, and we do not anticipate issuing a secondary equity offering. Moving to Slide 4. Let's talk about PLH Group's businesses. They are primarily a specialty contractor providing services to the critical gas and electric infrastructure markets. They specialize in first-to-last mile electric transmission and distribution services and provide installation, maintenance and other specialized services. PLH has a full range of capabilities supporting transmission, distribution and substation work. They also have a well-developed business and high-margin emergency restoration work, which includes more than 100 emergency response MSA contracts. They have an excellent track record working with large blue-chip customers with a 92% customer retention rate. On an estimated last 12-month basis as of May 31, 2022, PLH generated $733 million in revenue, translating to a solid $54 million in adjusted EBITDA and roughly 72% free cash flow conversion. Their electric distribution services generate more than 60% of their revenue through MSA contracts. Like from worse, they have both union and nonunion crews, enabling broader geographic and customer opportunities. PLH's power delivery business also has a growing presence in emerging utility markets, including connecting renewable power generation to the grid. Large-scale battery storage is a critical component of renewable power solutions and PLH has in place a supply partnership with a battery storage provider. Another key piece of this acquisition is PLH's gas utility business. Their current gas utility service offering includes a comprehensive range of integrity, maintenance, upgrades and replacement for investor-owned utilities and midstream customers. Natural gas plays a key enabling role in the energy transition. There are increasing requirements for further investment in gas utilities, driven by system modernization, regulatory requirements, fuel source switching and system congestions. The utility segment of the business accounts for about 80% of PLH's revenue. There is also Pipeworx, a component of business based in Canada, which provides industrial and midstream construction and maintenance services to the North American energy market, which will tuck in nicely in our Energy and Renewables segment. Moving to Slide 5. We believe that we are the best owner for this business. If you look at our long-term strategic goals, the acquisition is highly aligned with those goals. It doesn't just scale up our exposure to power delivery. It does so in a way that strengthens our ability to market our services in specific high-demand geographic markets. And scale does matter in the electric and gas utilities markets right now. Many large utilities are trying to consolidate their supply chains and specialty service providers, and a larger presence will make us more competitive when we are bidding for work. The acquisition also adds more than 1,000 union and nonunion skilled utilities craft employees to our organization, a valuable resource in today's tight skilled labor market. Culturally, PLH is a great fit for Primoris. They prioritize safety and doing customer relationships as we do. Their mission focuses on a professional approach as does ours on innovation and excellence. In addition, and as previously noted, their workforce is an especially valuable addition to our business. There are 2 additional reasons PLH is the right match for Primoris. It continues the growth of attractive and low-risk master service agreement-oriented work as a proportion of our business. And it gives us additional long-term profitable growth opportunities from PLH's strength in energy and emerging utility markets, including renewable power grid connection, maintenance, repair and installation services. Moving to Slide 6. Powerful decades-long tailwinds are a key part of why both the electric transmission and distribution as well as the gas utility services markets are so attractive. The electrical T&D of capital spending has increased steadily over the past decade and is projected to keep growing with an estimated $300 billion in total CapEx spend expected by 2025. Contributing this are an aging infrastructure and growing electrical demand, which includes a requirement to connect renewable solar and wind power generation to the grid. On the gas utility side, aging infrastructure and increased regulations are accelerating rehabilitation, efficiency and repair programs with an additional estimated $85 billion in total CapEx spend by 2025. Going to Slide 7. Geographically, PLH has a multiregional footprint that will fit well together with ours. Here's the math. You can see that the combined pro forma footprint reinforces our strength in fast-growing markets across the Sunbelt and in the Mid-Atlantic and Northeast corridor. PLH has an established presence in all 5 of the fastest-growing U.S. states by population. And 3 of those, California, Texas and Georgia are among PLH's largest markets by revenue. The remaining 2 fastest-growing states where PLH has a presence are North Carolina and Florida. The California market is especially significant, representing 30% of PLH's Electric Utility Services revenue in 2021. Slide 8 shows how PLH helps us advance both our sustainability goals as well as those of our client base. Going into a rapidly transforming energy landscape, we realized a significant role we play towards a more sustainable and environmentally friendly society. As I mentioned earlier, our growth engine of renewable services helps us support our clients to transition towards sustainable solutions for their communities. We are committed to continual progress on this front. With the acquisition of PLH, we'll be in an even better position to accelerate this growth and expand our renewable energy portfolio, serving clients across battery storage solutions, EV grid integration and renewable transmission infrastructure. We have the foundation in place to build off our best-in-class solar projects, and we'll continue to look towards the future that enables our clients to reduce their carbon footprint and meet their clean energy goals. The addition of PL enhances our capabilities needed to build the infrastructure necessary to tie in, store, transmit and distribute energy generated from renewable power source resources. On a larger scale, it aligns with our ESG goals of environmental sustainability and providing solutions that enable the energy transition. We know this is one of the major challenges the world faces and every move we make that supports a sustainable future is a move in the right direction for Primoris. Now let's look at Slide 9, where we show how the addition of PLH will immediately expand our overall portfolio. Here's the pro forma that shows how our business will look after the acquisition of PLH. The Electric goes to over 20% of our business, bringing our total utility exposure to 53% of a $4.1 billion business using 2021 numbers. Crucially, our MSA percentage increases to 48% of total revenue, again, helping reduce risk and smooth out the lumpiness associated with big fixed-price contracts. This transaction is well aligned with our long-term goal to expand our exposure to the attractive utility markets while also accelerating our shift towards lower-risk MSA revenue. Moving to Slide 10. This acquisition checks all the boxes for what we are looking for. PLH enhances our presence and capabilities in existing geographies with high-growth prospects and provides new customers while enhancing existing customer relationships. It delivers a strong platform for adjacent or new markets and strengthens our cross-selling opportunities with PLH's foothold in the renewable power to grid market, giving us an avenue to grow that grid connection piece. Finally, it offers new focus areas that Primoris can leverage to further differentiate our service offerings. It's not just whether it fits but whether we are getting a good value, and it checks those boxes as well. Importantly, key company leaders have agreed to stay on to continue to run the business, and they will help us add value to our organization long term. As I said at the beginning of this call, PLH is a very strong fit for Primoris, and we look forward to welcoming the PLH team as we work together to continue growing our business. I'd now like to open the floor to questions.

[Operator Instructions]. Our first question today comes from Jerry Revich from Goldman Sachs.

This is Adam Bubes on for Jerry today. It looks like PLH has 19% of revenues outside of utilities and more of the industrial and midstream space. How much of that piece is directly comparable to your pipeline segment today? And can you talk about the different types of industrial projects PLH has exposure to?

So there's a component of that, that is very much more comparable to what we do in our Canadian operation that supports the oil and gas industry, and it's not really associated with the pipeline business or pipeline segment. They do have a portion that compares to the pipeline integrity segment, not so much the cross country pipeline group.

Got it. That's helpful. And then I appreciate the capital intensity details provided on Slide 4 of the presentation. But could you help us think about free cash flow conversion for the business net of working capital in taxes as well? And what does that free cash flow conversion profile looked like over the past few years?

Adam, I don't have the past few years in front of me right now, but taxes are very much in line with our tax rate. And then working capital conversion is very similar to ours as well because of how much their business is similar to ours. So I think you can look at roughly 27% tax rate there, effective tax rate, I think, with respect to capital -- with respect to working capital, I think for us, kind of the general range is in the 10% range.

Our next question comes from Lee Jagoda from CJS Securities.

Just starting with -- I assume since this was a PE-owned asset, it was an auction. And if you could give us some detail around how long it was owned by private equity, the process that was run? And maybe a sense for the historical organic revenue trends for the business? And then any acquisition activity that PLH had undertaken over the last couple of years?

Yes, Lee, I'll jump in on that. So PE owned for at least 10 years. PE had been in this for a while. No acquisitions over the course of the past couple of years. And within their core business, a good solid revenue growth over the past couple of years. They've actually -- there were actually a couple of businesses that had been acquired probably almost 10 years ago that were not really core to the key business. They've actually shut down or sold over the course of the past couple of years, which actually made it very good for us. It actually streamlined the business and made it just that much more attractive to us.

Got it. And then just to clarify the comment around double-digit EPS accretion, is this double-digit percentage EPS accretion or pennies per share or double digits? And then can you just kind of...

Pennies per share.

Talk -- pennies per share?

Yes. Sorry.

Okay. So more than $0.10 accretive. I guess the other question is, you talked about both revenue and cost synergies around the commentary when you spoke about the accretion, but only called out the $10 million of synergies over the next couple of years. So is there -- what's the -- what should we be thinking about there?

So yes, so the $10 million is cost synergies only. And as you know, we normally don't quantify revenue synergies. We know there's going to be some. And that's part of what we will work on over the coming months as we continue to integrate them and see how our businesses work together and how we can leverage the broader business across their customers as well as their business across our customers.

And then just one last one on the accretion. Can you talk to the new debt facility and the rate expected on that facility and whether it's fixed or floating?

Yes. So the new facility will be a combination of incremental term loan plus a small portion of the purchase price will be a draw under our revolver, all of which we're going to be upsizing with our banks. The interest rate is the exact same as ours right now. It is floating LIBOR plus a spread, which is currently a little below 4%.

Our next question comes from Sean Eastman from KeyBanc Capital Markets.

Tom, Ken, congrats on the deal. I'm just trying to flesh out next 12 months EBITDA expectations. I guess the first question there is the margins -- trailing 12 months margins in the mid-7% range. Is that sort of how it's been over the last number of years? Is there anything unsustainable in there? Is there anything you guys think you can fix up in there? Just a general directional idea on where margins should be going here?

Yes. Thanks, Sean. I would say for the next 12 months, as we work on integrating this business, it's going to be in this kind of 7.5% to 8% range. Historically, they've fluctuated a little bit because of the amount of storm work that they've had. They've had some better years and some leaner years, no different than us. And so the 7.5% is a more normalized number that does not include a bunch of extra storm work. As you know, we don't normally bake storm work into our forecast. And so we want to make sure you guys were seeing a cleaner EBITDA that didn't have that in this.

Yes. And Sean, let me -- this is Tom McCormick. Let me just add. If you look at an annual average of weather events, over the past 4 years, the U.S. has experienced roughly 7 extreme weather events that generated over $1 billion in damages a year. The number of those -- of the same events have increased to 16 since 2016, between 2016 and 2020. We don't have any of those events. We benefit from those. The business benefits from those because they have over 100 MSAs in place for storm recovery work, and it's higher -- hard margin work, but there's none of that right now baked into these numbers.

Okay. That's really helpful. And maybe it would be helpful to understand the margin profile by sort of subsegment here. I mean, I'm curious what this other segment is doing from a margin profile perspective? And what's the -- on the other segment, is revenues kind of bottomed out there, and we're seeing some green shoots into the out years? Or is that going to be a declining part of the pie from a revenue perspective?

I think it's going to be a declining part of the pie from a percentage perspective because I think the growth that we're envisioning is going to be in the traditional utility side, power and gas. The other space, as Tom alluded to, he mentioned earlier, the biggest portion of that is more of an industrial business and pipeline integrity and maintenance business, predominantly up in Canada. And we expect that business just to be a good solid performer, probably a little growth, but not a lot of growth in the future. We're really -- we really believe the growth will be driven from the utility.

Yes. I mean, as Ken said, it's going to be a smaller part of our business as we continue to grow, but their margins are reasonable margins as we'd expect. So they performed well. It's just -- as our business grows, they become a smaller part of it.

Yes. Okay. And then is there any color you can provide on sort of employee retention, employee turnover trends at PLH over the past 1 to 2 years? I feel like the labor capacity in some of these utility end markets is really a big part of the play here. So some color on that would be -- and maybe also on how you guys are planning to keep that labor retention strong as you bring them on to the platform here, that would be a helpful dialogue.

So certainly, that's a good question. It's some -- we've paid a lot of attention to and due diligence. We have key members of their management team signed to employment agreements. They've agreed to stay with the company. They all are very interested in what they can do working for a larger company that creates -- that presents a number of opportunities for them with respect to career path and career growth. As far as their management teams, we have not gone below their management teams. We will do that in the coming weeks prior to close, and then it's obviously post close. But they have a really good mentorship program in place. They've done a really good job of -- especially when you start talking about the areas where there's the most competition for labor, and that's the lineman journeyman, they've done a really good job of retention in that area, primarily because of the career path they played out. They've got a steady line of business for these people. They are able to -- for the most part, unless they're on storm work, they go home at night. So I would say their turnover is not -- is probably slightly better than what you'd see in the market. And as far as retention, yes, we'll continue to do that. I think we'll help that actually because we create and present bigger, more opportunities for them to have more sustainable work. So I think the 2 combined companies will be viewed, and that's our goal really to be viewed as an employer of choice.

Our next question comes from Adam Thalhimer from Thompson, Davis.

I'm sorry if I missed this, but I didn't see a breakdown of transmission versus distribution for their power delivery business.

Yes. Adam, we didn't give the breakdown between the 2. And to be honest with you, I don't know directly what it is right now. It's -- I know that they are heavier on distribution like we are, but I couldn't give you the specific revenue breakdown.

Heavy on distribution. Okay. And then I think you mentioned California, was it 30% of the power delivery revenue or 30% of total PLH revenue?

Power delivery.

Power delivery. Yes.

And then I know there's a lot of work coming in California for power delivery. Like how did that play into your thought process on the deal here?

Well, it was definitely something we evaluated as part of our consideration and analysis. So it just creates more opportunity for us, got -- it gives us a little bit broader client base. So I wouldn't sit here and tell you that it wasn't a key factor. There were a number of key factors, though.

And then what is their total renewable exposure today?

Ken, I don't -- do you have that? I don't know that.

Renewables exposure. Most of their renewables exposure is on -- is in supporting and doing connections to it. But so it's relatively small, especially compared to us.

Yes. They're not building utility scale or distributed generation or anything. They're actually just connecting those to the grid. But they do quite a bit of that.

Our next question comes from Zane Karimi from D.A. Davidson.

Congratulations on the announcement. So first off, I was hoping to get a little more clarity on the backlog and outlook. In particular, what percentage of MSA contracts are up for renewal through this year over the next 12 months?

Zane, great question. I don't have that in front of me. But as I recall, it's a relatively small percentage within the next 12 months. And then the rest of them do renew over the course of the next 2 to 4 years in a cadence that's frankly very similar to our existing MSA contracts.

Okay. And then maybe can you speak to the opportunities to expand or your ability to expand the terms of pricing associated with contracts in the PLH portfolio?

Yes. Look, it's an interesting time that we're in right now. They are doing pretty much the exact same thing that we're doing, which is they're going out to their customers right now and making the case for the fact that we are in an unusual inflationary time, particularly in the area of fuel, to a lesser extent, on the labor side, but definitely still a factor as well. And so they're reaching out and having conversations with our customers and saying, look, we need relief here because we can't do work for you and not make money and margins are getting squeezed right now. So they had some success with it. I expect similar to us, they will continue to have more success over the course of the months as they have those -- as they finish having those conversations.

My understanding is they -- like our current MSAs, their MSA [indiscernible] indices, they're typically lagging indicators that will allow them to seek adjustments. Some of them are capped like some of ours were, and they're having the discussions with other clients to go and get some of those caps off of them about evaluating those going in and making adjustments now. So they're in the various stages depending on what MSA. They're talking, they're negotiating.

And our next question comes from Avi Jaroslawicz from UBS.

On for Steve Fisher. So maybe you could just discuss what you've learned from the Future acquisition strategically, operationally, financially that convinced you guys view this deal? How similar is this and how it's going to be different? Some color there.

Well, they're kind of comparing apples and oranges a little bit. When we bought Future, they were basically -- they were one company, but they had 6 different companies were in various stages of integration that needed to be fully integrated into our company. This one is not that way. It is essentially -- it's one company. They operate the same way, they have same systems, very similar systems and tools. So the integration will be much easier and they have a couple of different lines of business, but they're really not as diverse as the Future was. So I guess we can take some of the things that we learned in the integration of Future as far as timing goes, and we'll adjust how we integrate some of these -- some of the portions or some of the integration activities, and when we'll start some and complete some based on that, but there was really -- other than that, there's not a comparison.

Got that. And so just in terms of where you see margins going to and when some of the benchmark here there is run about 10% EBITDA margin has gone higher. So maybe if you could just discuss what kept you from getting to that level? If you think you can get to that level over the next few years? And maybe just help us bridge the differences scale, customer mix, contract mix, whatever you think it may be?

Yes, I think it's all of the above, right? They -- the margins -- we'll have margin accretion when we are able to realize the synergies plus just the combined -- in the few cases where we have overlapping customers, being able to work together and then work with our customers in order to tweak and improve the terms of the pricing in our MSA agreements, all should drive that percentage up over the course of the next year or 2.

And do you have maybe any targets, not necessarily officially, but in terms of how you're thinking of where you can get to?

With -- targets with respect to the EBITDA margin?

Yes.

Yes. I mean, our goal would be to drive that up towards 10% within the next probably 24 months.

Congrats on the deal.

Thanks.

And our next question comes from Noelle Dilts from Stifel.

Congrats to you and to the PLH team. I guess, first, I know you're both union and nonunion net prem and the same sort of thing at PLH. Does this -- on the electric side, does this increase your union exposure or -- I'm just kind of curious how the percentage of the mix will shift after the deal.

Yes. Great question, Noelle. We -- prior to the acquisition, we were, I would say, 90% open shop, open -- nonunion. And so with this, I couldn't tell you exactly what the mix will be. But we will probably be definitely more balanced. That was one of the attractive things that Tom touched on earlier with respect to getting more exposure to California and driving increased revenue there on the electric side. So ballpark, going forward with PLH in the mix, probably 70% open shop, 30% union.

Maybe 60-40. Yes. Somewhere in that range.

Okay. Yes, that's right. Okay. And then can you touch on just, again, sticking with the electric side, your customer mix? I mean, is there any notable customer overlap? Just kind of curious if -- when you're talking about trying to go back to your customers and get some relief maybe on some of these contracts, do you maybe have a little bit more scale with some of these customers that it might help with some of those negotiations looking -- or just kind of looking forward those types of negotiations.

So yes, that's a good question, Noelle. Thank you. So on the electrical side, yes, there's a little bit of customer overlap in some of our markets, in other markets, there's not. I think scale will help us. It helps us get some leverage because although our clients certainly from our experience, are looking for us to add crews and our competitors to add crews. They've got -- their budgets are increasing. You can see in electrical space, I think the spend is roughly $200-something billion by 2025. So there's a lot of money to be spent. So this will help us in that -- in those markets and help us in those negotiations, too. And we have actually had conversations with some of the clients, and we'll have conversations with some of our clients that -- where there's some overlap too and all the feedback was positive.

Okay. Great. And then shifting over to sort of the industrial segment and some of the pipeline work. Any large projects or anything like that, that folks should be keeping in mind in terms of concentration, I guess, on the electrical side, too? And just -- I guess, and then just to be clear, it sounds like when you're looking at growing sort of what's traditionally been the PLH kind of industrial and pipeline group, it sounds like it's mostly just the growth will be focused -- you're not really going to focus on mainline pipelines or long-haul pipelines at this point. It will be smaller projects and then the distribution work, is that fair?

That is fair. And that's really what their group does as well. Their average project size, I think, is less than $1 million. And if you look at electrical, the average project size is about $170,000. So they don't have any cross-country pipelines or anything of any real major significance on their books.

And at this time, we've reached the end of today's question-and-answer session. I'd like to turn the floor back over to Tom for closing remarks.

Yes. Thank you, and I'd like to thank everybody for joining us today. As I noted earlier, we're very excited to have PLH join the Primoris family of companies, and we look forward to what the combined companies can accomplish as we play a key role in America's energy transition. Thank you, everybody. Have a good day.

Ladies and gentlemen, that does conclude today's conference call. We do thank you for joining today's presentation. You may now disconnect your lines. Goodbye.