Primoris Services Corporation (PRIM) Earnings Call Transcript & Summary

All right. Good morning, everybody. This is day 2 of the JPMorgan Natural Resources Conference. My name is Mark Strouse. I cover clean energy and power infrastructure at the firm. This next session is with Primoris. So we've got Koti Vadlamudi, President and CEO; and Ken Dodgen, CFO. Gentlemen, welcome. Thanks for coming.

Thanks, Mark.

So I imagine there's a lot of questions in the audience. I promise you we will have plenty of time. Koti, maybe let's just start with kind of the elephant in the room, kind of the press release that you guys put out on Monday. We'll come back to the gas business, but maybe starting with renewables. Just kind of give us an update on that press release.

Yes. Thanks, Mark, for the opportunity of hosting us. And -- so I guess what I'd start with is, first, and I said this in the press release, very disappointed in the results and in a short period of time, a fairly dramatic revision to the guidance. What drove the changes was as we remobilized site, encountered field rework, remediation, weather impacts that manifested itself in cost and productivity impacts that previously were not forecasted. With those changes, had to take some accountability measures and previously announced a leadership change. With the leadership change also utilized the expert of an outside consultant with 50 years' experience to do a review of the portfolio. I suppose one silver lining is that we had previously indicated it was 6 projects in the portfolio that were distressed. That is the case as a result of the review. It is ring-fenced to these 6 projects that came into the portfolio circa 2024. So it remains those 6. As we indicated in the press release, 2 have -- we've satisfied our obligations and hit substantial completion. One will hit the same milestone substantially complete in a few weeks. And the 3, the remaining 2 will finish hit substantial completion in mid-September, and the last one is tracking for the end of the year. So we are very focused on now the 4 remaining projects in the portfolio and looking forward to achieving those milestones and then putting them in the rearview mirror.

Okay. Great. Thank you. So I think the obvious question is, I mean, how do we all take comfort that things don't get worse or expand from here? I mean I do -- you go back to the 4Q call and the 1Q call, I mean, there was confidence then that things were ring-fenced, but now you bring in the third-party expert. Just kind of maybe talk about the approach to guidance that you've taken, how conservative you've been here.

Yes, you bet. And of course, again, very disappointed that we had to, in a short period of time, revise guidance downward. But when it was -- when we saw the indication that the reforecast was going to drive a different number than we previously reforecast, -- we did, again, made the leadership change with the leadership change and the outside consultant did a deeper review of the estimates to complete, not just on the 6, but the entirety of the portfolio. So they did a review of the physical progress percent complete. They looked at the productivities to date. They looked at the craft labor ramp. They looked at the milestone schedules and matched all that up to inform the quantum of effort that was left to go. And that effort then led to a review of the SG&As, the business funnel. I should mention that the impact that we're talking about largely is the margin erosion. There is some impact to deferral of projects that were slated to start and they've moved a little bit to the right. So there is some impact from that. But we tried to holistically look at the entirety of the portfolio. And the rest of the business outside of renewables were static. So the change is focused on primarily in renewables. So we feel confident. We did put some cushion to give us further confidence that we'll hit our revised guidance and very, very focused. I have the consultant still in doing his work and sort of focusing his efforts going forward on the remaining -- it's really 3 projects because the third one will hit substantial completion, but really focusing on the other 3 and making sure we hit the milestones going forward.

Is there one project that was particularly larger or more kind of detrimental to earnings than the others?

Yes. There's the one in particular, and it's the one that has the least maturity in terms of field and the one that we [ removed ] this late spring, and that's the one that's slated for completion at the end of December, a large amount of the revision was in the estimate to complete on that project. The good news is that we have a really strong -- we've upgraded our -- not just the leadership that I previously talked about, but we have a field superintendent there that's one of the strongest in the team. He's directing the workforce. We have a big -- in front of us, we have the summer months where what was plaguing from a weather standpoint and impacting productivity. We're looking forward to a little bit more inertia and having good progress percent complete in the summer months. And visibility so far shows that we're turning things around. So giving us more confidence with the additional scrutiny.

So I think all of these 6 projects originated in the second half of '24. I mean what was unique about that time frame? Was there kind of a management change? Did you change your approach to contracting? I mean I don't know, talk about that. And then for the projects that have been originated since, if anything has changed since those?

Yes. I think the way I would characterize it, and it's pre my tenure, but I did ask a lot of these questions. And in -- as that business was growing at a pretty good clip, in 2025, we hit a peak of nearly $3 billion in revenue. So a lot of projects happening concurrently. 2025 was also -- we saw some acceleration. A client came to us and wanted to do 2 projects in parallel that were supposed to be staggered. So it sort of contributed to this sort of inflated burn rate and revenue. In that 2024 time frame where these 6 projects came into the portfolio, and I'm not using the word bid because these were negotiated awards. It wasn't a case where the team was trying to underprice somebody to get the work. This was client relationships that informed and at their behalf said, hey, in some of the locations, we hadn't -- we don't have a track record and didn't know the labor force very well or the jurisdictions having authority. But despite those risks, the team thought they had those captured and the client relationships suggested, hey, can you help us and we went there. So I think there was probably a little bit of risk reward balance that was underappreciated. Terms and conditions weren't terribly different than what we have in place today. I'd say there's a little bit more -- there's a fair bit more rigor in staying disciplined on that risk/reward balance. I think I noted previously in a forum in Q1, we had an opportunity with a client. It was a couple of hundred million dollar engagement. We were the selected -- #1 selected firm to do the work. We turned it down and declined it on the basis that the terms and conditions were too risky for our risk posture. So I think there's a lot to be in staying -- remaining disciplined in what we bid and no bid. And then in addition, in 2024, we added a lot to the indirects. I talked about the steep ramp in the renewables business -- as they grew, they were slow to increase functions like project controls, preconstruction, estimating, project management. So that increase from '24 to '25 in the functions I described was a net increase of 40% of the revenue. So significant adds to leadership in terms of giving more predictability and execution in the portfolio. And then I'd finish by saying when we did this exhaustive review of the projects to give us the conclusion that it is just the 6 projects that are ring-fenced. There are other projects in the portfolio that are earlier in their stage of execution. We feel very confident that -- and we're doing a review to make sure we have the right project leadership in place, but it's a little bit more of a proactive measure just to make sure we don't have any other surprises. So there are things that are happening that are informing upgrades to teams and making sure we have the right reviews and processes in place to give us more predictable execution.

Okay. How committed are you to the renewables market over time?

I did -- given some of the changes, Denver is sort of our headquarter center of gravity for our renewables business. Over the last couple of weeks, I've spent a fair bit of time there doing town halls with the team, meeting with senior management as early as last week, I did a funnel review. funnel is what we call our pipeline of opportunities. We have a pretty robust CRM tool that we use to track opportunities and pursuits. That totals over $15 billion, which gave me an indication the market is really strong. We went line by line by customer, by opportunity to make sure we're how we're synced up from an executive standpoint with the client relationships. And that's a proactive measure given that we've made some changes. We want to make sure that we've got good solid client relationships in place. So I walked away from that with a very, very deep conviction that the market is very strong. We still have a very strong footprint in the business, and we'll build off that. So -- and I said that to the team, and it was about committing to that group that we remain a big player in this space. We've enjoyed 14 gigawatt hours of installed capacity in this space. So we're a well-known player given the $15 billion-plus funnel, which is not just a market outlook, that's discrete opportunities that we see. We won't go after and win all of that, but it does give me confidence that we should stay in that market, and we have the talent to bid, win and execute in that space.

Okay. Can you talk about go-forward bookings? Are you kind of purposely pulling back on bookings until some of these issues are fixed? Any comment on 2Q or fiscal '26?

Yes, good question. And we're not artificially restraining in terms of what we're putting into backlog given the funnel and the opportunity and line of sight to projects, I would say we are being very disciplined. I go back to the engagement that we decided not to sign, and that was remaining steadfast on the risk reward posture. The market is strong, so we should be sensible and positively discriminatory in what we put into backlog. So we'll be committed there and use that as a filter, but we're not artificially restraining growth. I do think as the projects come off the -- come out of our backlog, a lot is in Q2 in terms of margin erosion given one project significantly taking some degraded margin. So we're looking forward to restore the margins in quarters as those projects come off the books. It is -- the market is a little bit back half weighted for us from a calendar year standpoint, the renewables team. We always thought Q1, Q2 would be a little bit lighter, but see a couple of billion back half of the year, which will set us up well for 2027.

Okay. Yes. On that point, I mean, I know you're not going to guide to '27, but you've taken down the numbers for '26. Do you expect just general growth next year in this business?

I think it will be modest. I think, again, in the press release, we talked about a $2.1 billion number for renewables for 2026. I think, practically speaking, 2027 will be a modest growth from that, flat to modest for 2027. But the market is there. And given back half of the year, the bookings, which we always knew we were going to be a little bit weighted that way, we think we're set up to drive better margins given that these projects will come off the books and feel confident going forward that, that's achievable.

Okay. All right. Now going back to Monday's press release, there was also an update on the gas generation business. Can you just give us more color on what you're seeing there?

Yes. And we've previously talked about our overall portfolio, and I think Primoris did really well in shaping what end markets we were playing in. Gas power generation driven by this strong secular trend for need for power to satiate in large part, AI data centers, but it's also onshoring of other manufacturing. And so this need for power and our skill set and ability to deliver that in a self-performing EPC turnkey solution, I think, is needed. And so there is -- it's not a super crowded space. I mean you look at the players that are out there that have the wherewithal to self-perform on an EPC basis. So I think what you saw in the positive trend in backlog is what we previously narrated as the opportunity was in front of us from a gas power generation standpoint. I do want to point out here from a risk standpoint because this question has been asked before is, given the size of those projects, from a risk standpoint, what pitfalls might exist that is there some learnings from the portfolio. And I do just want to point out there, the execution approach there is far different than what we do in renewables. We start out open book. It's a reimbursable contract with the client. They'll give us a limited notice to proceed to enable us to do early long lead -- order early long-lead equipment. We'll sufficiently progress the engineering to enable us to do detailed material takeoffs. As we buy down, we know with some level of precision what the cost estimate is going to be. We work with the client on the investment decision, both for cost and schedule. And then only then when we're at that sort of mature engineering scope defined phase, do we lock in a fixed price lump sum guaranteed maximum price. So it is a fairly risk-averse profile. And given the amount of work that's in the market, we think the way we're approaching it is a sensible approach, and we'll positively discriminate again on the funnel of opportunity where our execution approach aligns with the client. So we were excited to announce that. There were a couple of other areas in those bookings, industrial as well as I'll maybe provide a little bit of color on the data center market. But that's a booming market. You've seen the hyperscale investments in that space that are buoying the CapEx in a big way. And so with the acquisition of PayneCrest, we are seeing a lot of opportunity in the hyperscale space. They have a really good resume with one client in particular, in the geographies where they've already been. They're utilizing craft labor force and have work -- subsequent phases of work. So they're essentially getting in a position where they're sole-sourced work with that customer. And then they have other industrial work in their backyard that's also opportunity for them to grow. So we're only a little bit over a month into the integration, 1.5 months into the integration with them, but showing really positive trends for growth and excellent cultural fit.

Okay. Are your gas gen projects simple cycle or CCGT?

Most of the projects are simple cycle, and it's not -- our competency is in all types of scopes. So we do have a number of opportunities, I think 3 at the moment that are combined cycle. They're larger in scale, so our fee and engagement will be higher on the combined cycle. But the vast majority of our pipeline is informed by Simple cycle. And if I didn't say it here, we don't put the turbines on our paper. We're not procuring that or warranting or putting performance guarantees around that. That's owner furnished equipment. We're a necessary stakeholder in building the schedule together. But from a risk standpoint, we don't think it makes sense for the owner or for us to take that on. So that's not part of our fee engagement. But to your question, the vast majority is in the simple cycle area. And most of that is driven by time to market. Everybody just needs these AI data centers, the developers are just looking for how fast they can get power, power delivery.

Yes. Okay. Can you talk about the transmission business, how that's going? I think you've got some new customer relationships there.

Yes. Another great secular trend for us, and we're well placed. The power delivery piece of our utilities business is largely MSA driven. I'm pointing that out because, again, from a risk standpoint, it's lower risk. The MSAs are informed by multiyear relationships with the client. They have -- some of the utility clients have CapEx cycles that are quite -- are longer compared to others. So we have good visibility in terms of resource planning and capacity. I think the bias is going from distribution to transmission substation. That's a nice portfolio mix for us because it is healthier margins in the distribution side. It doesn't mean we can forgo the distribution side. You have to do that work to have the ability to pivot to that other transmission substation. But it is a nice trend in the backlog. We have current customers that where we've been working with them for a very, very long period of time. They, in some cases, do the engineering themselves and we're the construction partner. They know based on the volume of work they have to do, they're switching to an EPC model. So we're already in discussions with the client about how we do a turnkey delivery project execution model for them. And then we have some new customers that are seeing their overall supply chain tapped out. And so they need to explore other options, and we have the requisite skill sets to bring our expertise to them. So seeing a nice organic play there and really excited about the opportunity to grow in that space. And really consistent with -- you've got power generation, you need to be able to move the electrons. So that space, the substation build-outs. And then though we haven't talked about it, it's also the natural gas that you have to move to enable to fuel up the turbines. pipeline.

Yes. Okay. Thank you. Any questions?

In terms of the problem projects that you're dealing with, thank you for a lot of color on that and what went on and how you're resolving it. Could you also talk to what the cadence of the rest of the year would look like? The guidance was helpful. But in terms of margin erosion, you mentioned 2Q will be the bulk of it. But then there are still a few more projects. So when should we expect sort of to have these projects in rearview?

Yes. So you're right to characterize the bulk of the impact is in Q2. And maybe I'll let Ken give a little more color on that as it progresses through the year.

Yes. I mean what it looks like right now because of the write-downs will all be in Q2. Q2 will most likely from an EBITDA perspective, be about breakeven, and then we'll be sequentially growing from there. We did $60 million of adjusted EBITDA in Q1. I expect Q3 will be somewhere in the $80 million to $100 million range, and then Q4 will be a little bit north of that in order to get in that EBITDA range that we talked about. And then with respect to with the projects themselves, most of them will be burning it -- of the 3 that will be remaining in Q3 and Q4, will be burning at 0 gross margin. The other 2 will just be revenue burned at very low gross margin.

I think in the guidance cut, there's a revenue cut. If I understood correctly, that's due to the project pushout. I just want to confirm that has nothing to do with the 6 projects. Then on top of that, obviously, we always know the project pushout has been a constant theme in the renewable space. It happens all the time. So I wonder how do you think about that going forward?

Do you want to just confirm that is the case.

Yes. And it's not uncommon for this to happen. This is a little bit of a unique situation because of everything that's happened over the course of the past year to 1.5 years with the tariff interruption, the OB3 that was passed last year, the treasury regulations that came out and then now getting clarity on what the 48E requirements are with respect to labor. So what it's caused is not necessarily any problems with us. It's our customers now having to either resequence projects based on panels and other things like that, that are safe harbored or redesign or reengineer projects in order to get the best use out of the safe harbor panels and make sure that we collectively between our customer and ourselves, have the right labor force and have everything set up properly so that they will get the best benefit from the tax credits. It's a bit of an unusual situation that we've seen in the entire time that we've had our renewables business and been building these. We've never seen anything as disruptive as what we saw over the course of the past 5 years. We were fortunate it didn't have much impact last year. The residual effect into this year is what's driving that revenue push out, though.

So just as a follow-up, obviously, it's out of your control. So I just wonder, going forward, how would you factor those into your guidance or your communication with the market?

I think based on the client relationships and we are knowing what sort of the move -- what's making them move, Ken talked about 48E, tax incentives, if they have a PPA that's in place, the timing of all of those things and the -- how much in order to maximize the tax incentive, what do they have to do? Do they have to reengineer that kind of stuff. So I think what informs from a timing standpoint when they hit our portfolio, it's the customer relationship piece. It is the hardest part for us, but we do it as a business, not just in renewables, but we have to predict when things time in order to reserve capacity so that we have the field resources in order to do the work. We largely get it right. That's why we're relevant in the space, but we are -- we do have some dependency with the customers, and that's why we're -- we talk with them regularly.

Sure Is there any concern around the data damages given the timeline of the projects and so is that baked into the current guidance? Or is that something.

Yes. And I'm presuming it's on the 6 projects you're talking about. Yes. There are -- all the contracts do have milestones that impose liquidated damages, and we took a view on those conservatively to bake that in. But we're progressing them so those don't get imposed.

Just to make sure I have the numbers right. Is it $300 million of revenue push out this year. But I think you took down the guidance by $200 million. So what's the difference there?

Yes. The offset is just the timing of burn of other projects that are actually going to make up another $100 million of to that. So the project pushouts, though, it's a combination of those -- the gross margin not being there because of the pushouts as well as a little bit of under-absorption of indirect and overhead. We're hoping to rightsize that over the course of the balance of the year, as Koti mentioned earlier, and maybe get some of that back. But as of right now, we haven't built that into the guidance reduction.

Can you talk about the kind of plans with the buyback with the stock pulling back like it has?

Yes. So we did announce and we had a previous authorization for $150 million in stock repurchase that the Board authorized. We implemented in the quarter $50 million of that. And given the valuation today, we do think that's a lever that we'll deploy. And so we'll provide updates as we go there. But that, I think, given capital allocation strategies that is probably increasing priority given where we are.

Last chance? Okay. We can wrap. Koti, Kim, thank you so much.

Thank you all.

Thanks, Mark. Appreciate it.