Primoris Services Corporation (PRIM) Earnings Call Transcript & Summary

Okay. Good morning. Welcome back. I am Steve Fisher, UBS machinery and E&C analyst. We're very pleased to have the management of Primoris Services with us today. We have Tom McCormick, President and CEO; Ken Dodgen, CFO; and Kate Tholking, Vice President of Investor Relations. As a reminder, if anyone has any questions for our discussion today, please submit them through the app of the website, and they will come directly to me, and we can address them. So with that, Tom, Ken, Kate, welcome. Thanks very much for being here.

Thanks very much.

Great. Yes. Just to kick things off, just want to ask you guys, what are the most important things that investors should know about Primoris? And what's really the key message you would like investors to take away from the day today?

So I'll start, and I think then I'll let -- this is Tom McCormick, and then I'll let Ken add to it and certainly, Kate, if she has anything to add. One, we have a healthy backlog, about $3.2 billion in backlog. A very strong balance sheet. We have a good mix between MSA work, which is basically unit rate or reimbursable, has a reimbursable component and fixed price work. We -- the average size of our projects are about just less than $4 million, at or below $4 million. We're not a company that takes on big risks. We're more of a specialty contractor than we are and certainly an EPC contractor like a Fluor or McDermott. We don't take on those large project risks. We definitely are in some growing markets such as utilities for both gas and electrical and renewables. So there's a lot of opportunities for our company to continue to grow, and we're seeing opportunities in those markets. You want to add to that, Ken?

Yes. The only thing I would add, Tom, is we have come through the COVID-19 issues over the course of the past few months very strong. We've been very pleased with our results. We have been able to keep almost all of our 12,000 employees working during that time and safe and healthy and our balance sheet continues to remain strong. We continue to keep leverage at low levels and keep strong cash balance. So we've been really pleased with where we are right now.

That's great. Thanks for that. Now as you think about the opportunities for the business out there, which ones are you most excited about for the next, call it, 12 to 24 months? And which do you think are going to be the biggest needle movers to your financial metrics from here?

Well, certainly I think renewables. Renewables is both -- includes both our renewables group, PRE, the business unit, as well as our industrial construction groups. We recently announced a $200 million award for a biodiesel project. We have our nonunion industrial group, just awarded a project with another client for a green diesel project. And then, of course, you just saw a limited notice to proceed award on a -- what will be over $100 million solar project. And we expect to be able to announce another one here in the not so distant future. That PRE business unit will exceed $200 million in revenue this year, which is almost doubling where they were last year and expect them to continue to grow. Very good opportunities there. Very good opportunities also in our utilities group, both gas and electrical, Transmission & Distribution. So we expect to continue to see growth in those segments.

Perfect. So I definitely want to dig into those a little bit more as we go throughout the discussion here. But maybe just to start off with the business model and the strategy. And I would say that as we've analyzed the group over the last couple of years, construction has really not had the greatest attraction for investors. And I know you just characterized the company as a specialty contractor. And you kind of referred to yourselves as required infrastructure services company, but not construction. So how would you differentiate the services that Primoris provides compared to construction?

Well, when I talk about construction, I'm talking about large projects. North of -- EPC type projects, north of $250 million, $300 million. While we do have companies that execute those size of projects, particularly our pipeline -- both of our pipeline business units, Rockford and Primoris pipeline, there are reimbursable components to those to their contracts. There are pay items, but they also -- that is a specialty for them and they have an expertise in that. And you'll see us take on some larger lump sum projects in the $200 million range with respect to our ARB Industrial group, which is a union group in California, when it comes to a combined cycle power plant. But again, they're concentrating on things that they do well. Of course, you're seeing less and less, fewer and fewer, I guess, combined cycle power plants being built in California. So they reverted over to doing biodiesel and other projects and picking up smaller capital projects. The majority of our work is recurring -- the balance of our work is recurring revenue, it's smaller capital projects. Again, average size. If you look at over the 4,000 projects that we have, average size is less than $4 million. They can be as -- so work order can be as small as $1,500, could be as big as $20 million and perhaps even larger. But a lot of those are unit right where we have a risk component with respect to productivity, but the client has a risk component with respect to quantities. And so we don't take on that risk that really cripple the company. The only other segment that we have that -- or the business unit that we have that takes on lump sum work is primarily our Heavy Civil group. But you can see, over the years, they pretty much stayed at about a $400 million a year revenue. We've been very disciplined about the type of projects we let them take on. We've been very disciplined about how they estimate their projects. And you've seen that gone from losing money probably on a quarterly basis until they made money. Over the past year, they went from 2% margin to 6% margin in Q1 of 2020 versus Q1 of 2019.

So as you think about the ideal mix for Primoris of the various services that you provide, be it the maintenance or be it more of the installation or construction, do you have an idea or an ideal mix of what those services you should -- you provide should be?

Well, I'd like to see a balance. We're about 42% to 45% MSA, recurring revenue type of work, which has a reimbursable component. I'd love to see that 50-50, maybe 60-40. I don't want to walk away from the lump sum work because that does keep our people hungry and it keeps their pencils sharp, makes them pay attention. Though we do preach to teach and manage a reimbursable job just like you manage a lump sum job. It does help. And they can draw larger margin sometimes as you take on a little bit more risk. We just want to be smart about how -- what risk we take on or what projects we pursue. We make good money on projects that are $4 million to -- when we do execute larger projects to $100 million, but we don't want to get in, make it a habit of getting in and pursuing unless it's a pipeline project, the $250 million or $300 million project where you expose the company to a lot of risk.

And that sort of goes to the next question I had was that you have on your website that over -- company has been around certainly a long time, with a strong history at over 7 decades. Primoris has developed a reputation for taking on challenges that others will not. As we think about what worked historically, do you think that still holds today? And is that -- how should investors kind of digest that as investors seem to be in the space looking for a strong degree of consistency?

Yes. I would say the answer to that is we will still take on risk, but it's -- primarily it's only in areas where we have a -- we have the capabilities and the experience and the historical experience shows that, that's our -- we have an expertise in that. We're -- I will tell you that as far as MSA-type work, where we want to grow our businesses in other areas, we'll look at anything as a company because we're pretty fleet afoot, we can make decisions on acquisitions or going into a project work where there's not as much risk, but it may create a new business line for us and may give us a new niche or separate us from our peers. So as long as it's recurring, it's obviously legal, and it's sustainable and it makes money, this is certainly something that we would look at. But from a risk standpoint, we have certain areas, power plants, combined cycle power plants certainly out in California because we have an expertise out there. Pipeline projects. I'd say those are projects that -- there's only a few companies in the country that can do large cross-country pipelines in our Rockford Group and certainly Primoris pipeline has showed an expertise in doing that type of work, and we'll continue to do that work.

And I guess maybe kind of continuing along those lines, I think one of the challenges that some of the publicly traded companies in the sector have had to deal with is the balance and the trade-off of growth versus risk and whether they are compatible or not. And having the sort of the strength to say, all right, we can walk away from these kinds of projects because it's not going to be worth the risk. Do you think growth and risk acceptance are compatible?

Yes. I do, to an extent. I think you have to be smart and you have to know what your risks are. We're not -- we've reached to our guys, we are not driving -- into driving revenue without margin, and we're not going to. So we'll openly take on a project if we need to because we have a key project team or key group of individuals at a lower margin that we want to keep employed during slow times, but we also will build contingency into those estimates and make sure we're making money. But there would be a reason to do that. It's not -- we're very careful about going to work for clients that we haven't worked for before. We're very careful, very strict about what kind of contract terms we take. So no onerous terms. And if we do them, it's with a client that we have had experience with that we have performed successfully with and we know they'll treat us fairly. Going in with a new client, we have walked away from projects and opportunities. If the clients know that the contract terms are onerous or there are just unknowns about the project that we just can't take on that risk, we'll step away from it.

Got it. And you mentioned before, I think you said 42% to 45% MSA and the risk or the -- I guess you wanted to go -- you said 50-50 or 60-40 on the MSA. If I have my numbers correct, I think overall you're about 25% fixed price, which, I guess, is a secret...

That's correct.

Framing than your MSA versus non-MSA. I guess just thinking about that 25% fixed price, do you have a sense of what the ideal mix would be there?

No. I mean I have an opinion. It really depends on what market, what industry and what the work is. There are certain types of work that we'll take on a fixed price basis. The majority of our projects are a mixed bag. They'll either have some fixed components and they have some reimbursable components. We take risk of productivity and the client take risks of quantities like on unit rate type contracts. I don't consider those to be fixed-price contracts. But if we can get our arms around the scope, and it's something that's in a business or an industry that we do well and have a history of doing, again, I'd -- I like the fixed price because it does keep our people aggressive. It does keep us sharp. And then you have the ability on those projects to make a little bit more money.

Got it. And when I think about the specialty contracting area, in many cases, the companies tend to be a little bit more narrow and specialized in their focus. And one of the things that's unique about Primoris is that there is a little bit more diversification here. How do you think about the opportunity, the value of being a little more diversified versus being a little more narrowly focused? I think from an investor perspective, it's always easy to get your arms around an investment thesis of, okay, we know this company has -- is the owner of the narrative on whatever the end market is, be it electric transmission or communications or roads and bridges. But you guys have skill sets across a variety of areas and are more diversified. How do you think about the model in terms of being more diversified versus being more specialized?

I think it's a net benefit to us and to our shareholders. It gives us a lower risk profile when other -- some markets are down and some of our businesses are down because of the -- let's just say, use an example, price of oil. We have a number of other businesses that aren't even affected. And then you talk about seasonal. We have businesses that are a little slow traditionally in the first quarter. We have other businesses that are doing well in the first quarter of a given year, just due to the weather in the areas that they work. So I think that's a big benefit to us to have that diversity.

That makes sense. One of the other just general industry topics has been labor supply over the last several years, really. And it's probably done nothing but intensify. And you're a company that some of the core value-add is having access to a skilled labor force. How do you think that dynamic shapes up over the next 1 to 2 years going through, obviously, a broader macroeconomic situation at the moment? So where do you think we're going to go in terms of the labor supply? And how are you planning for that?

I think for skilled craft labor, certainly in industrial markets, welders, millwrights, electricians, there is certainly a concern that there's going to be a reduction, and you've seen the numbers drop in the number and quality of the craftsman that are out there and that are available. That certainly hurts the large projects. If you go on one of our smaller projects, we don't really see a lot of those issues because we're trying to -- we're peaking at 300 people, 350 people. We may hire 20 welders. And you can cycle through some, but you can usually find 20 or 30 welders that you can get that will stay on the job and finish the project for you. So it's -- for a mega project, that could be a really big problem when you're looking for 600 welders. Not so much us, but you are seeing a shortage. We are doing some of our own training in our utilities group and in our electrical and transmission group. For Southern California, we're tied to the building trades and the unions, and they do a lot of their own training. And so we have opened our own training school with respect to lineman journeyman because that is certainly one area where there's a limited number of them, and it takes a number of years to develop them and create one or have some trained persons like go from apprentice 1. Becoming a journeyman is about 4 years, and we are looking at opening another training facility to do the same thing on the East Coast. We do training in our utilities groups, both PDS and Q3C, so we can train the gas distribution journeyman lining -- lineman. And we're doing some cross-training so that we can move resources across from the gas side to the electrical distribution side, not the transmission side so much when they're doing underground work. So we can move people when there's a need or we have a shortage of work in one area and we have a need or there's even seasonal shortages. But it's definitely going to be a problem this coming years for companies that don't get ahead of the curve and are training their own people. But you see a lot of companies that have gone into that now and starting to develop their own people. We have partnerships with training schools. We go into an area for a period of time and it looks like we're going to be there. We have offices in areas, we tie up with training schools, junior colleges or colleges that have training programs as well.

Sounds robust. Another industry topic that's certainly affecting the overall market today is COVID-19. And just curious, from your perspective, which of your various businesses would you say have been most affected? And which are really least affected?

They've all had some impacts just because of the requirements for social distancing and -- but all of our businesses have been deemed essential. So they're all working. We just had to work around. All the health orders that have come in place, there have been some areas where we've had -- our employees or offices had stay-at-home orders, which made it a little bit more difficult for them to come out, but they have come out because, again, they're part of an essential business. We have -- so all of them have had some impacts, and there's been -- clients have been a little bit slower to release work orders or to release projects because of it and the long-term effects of what impacts it may have on projects going forward are yet to be sensed. So we'll see what happens. With the phased reopening of all the states, I don't see that as being a bigger problem. We had a couple of businesses affected by the price of oil, too, one primarily up in Canada, but they've rightsized and they're still working, and I think they're doing fairly well. The revenues are going to be down, but they should be in pretty good shape despite that.

Okay. So one of the stated goals that you guys have as part of your strategy is to grow in your targeted markets. Can you talk about some of the strategies you have to actually achieve that growth in those targeted markets?

Steve, this is Ken. Yes, it's a number of different things. So when you think about electric and gas utilities, a lot of our focus there is organic growth and just continue to expand geographically or to do more work with existing customers. And frankly, that's a theme across almost all of our segments, but in particular across those 2 segments. In addition, we continue to look for strategic acquisitions that can complement us and give us some added growth in those areas as well. On the Power and Industrial side, most of that growth will be organic as well, again, new customers and additional work with existing customers. Within our Civil segment, most of that segment growth will be organic as well as we continue to expand and do more work with DOTs, predominantly in Texas and Louisiana, and then expand and do a little bit more work maybe with airports, and municipalities and other things like that. And on the pipeline side, I don't see us doing any acquisitions on the pipeline side. We already have plenty of pipeline exposure right now. I think that's us just being responsive to the market with all the customers that we work with right now. And as you know, we work with all the majors there, with respect to both mainline pipe construction as well as with pipeline maintenance and repair.

Got it. And...

We know -- Steve, all of our businesses -- sorry, Steve. So we're pretty particular about where we're trying to grow. In the Utilities groups and T&D groups, for sure, we target certain areas of the country where we have opportunities. We have a client relationship that opened the door for us to go in there. We see that with supervision and personnel and then you try to grow into that market. It's been -- we've done that organically, and there's some opportunities for us to perhaps buy some smaller outfits that are already existing and operate in those areas that will help us grow as well. But Heavy Civil is not an area that I would say that we're going to grow. We got them in a revenue number that's manageable for them, and they do extremely well. They've certainly improved over the course of the last couple of years and how that -- on their performance. And as long as they're making money and they can achieve those revenue numbers, we're happy.

And in terms of M&A, one of the things we've heard in the industry that perhaps this disruption over the last few months has created some additional companies open to transacting. What are you seeing out there in terms of potential deal flow, things coming across your desk? And what kind of businesses are for sale today?

It's really been slow.

Very slow.

I'll let Ken add to this, but it's really -- before the pandemic, obviously, we were getting things daily, if not multiple times a day. It's really been slow. There's some targets that we had identified, I don't want to go into what they were before the pandemic, but some of those processes have come to a halt until after the pandemic ends or sometime later during the course of the summer, we hope. And I'm sure they'll come back to life. Some of them we're involved in. We've got some other things that we're looking at and targeting, but it's more just conversations right now. Everything is still pretty slow.

Yes. And Steve, within the industries that we work in, because almost everybody has continued to work, most companies should be healthy right now just like we are. So we've got a couple of people asked us the question, okay, what about companies that are in trouble right now and kind of need to do a transaction? It would have to be really strategic for us to look at that business right now. Frankly, if they're in trouble right now, that means they're probably not in a business that we want to be in because we're very disciplined about acquisitions. We want good, strong businesses with good management team and good growth prospects and not turnarounds.

Got it. Makes sense. I guess maybe related to taking a step back in this regard, just thinking about maybe the cash flow profile of the business. How do you think about what this business should generate in cash flow on an ongoing basis?

Are you talking about our company or you talking about an acquisition opportunity?

Yes. Sorry, taking a step back, and maybe I should have asked this before, the capital allocation and discussion to M&A. But just curious about cash flow. Again, I think one of the things that investors are thinking about as they approach the sector these days is the consistency of cash flow, the robustness of the conversion rates and then what that enables in terms of growth or capital allocation. So curious how you think about the cash flow profile? And as you think about dialing up, maybe that fixed price/mix a little bit here and there and how that might affect sort of the consistency of cash flow?

Yes. So for us, we have a little bit of seasonality to our business. Tom talked a little bit about that earlier. Our cash conversion cycle is generally very back-end loaded during the year. And you see that in our cash flow from operations. So we're very cognizant about that. That said, that's another reason why it's always so important not to be over levered to maintain a healthy balance sheet, to pay close attention to your receivables and your billings and other things like that, so that you're billing timely, collecting timely from your customers and able to maintain a strong balance sheet. So we keep our debt levels low. We are very disciplined about CapEx to make sure that the CapEx matches the growth opportunity within our respective businesses. And then free cash flow enables us to easily service our debt, but then give us excess cash in order to then decide whether or not to delever, invest in organic growth within our businesses or take advantage of acquisition opportunities. So we really feel like we're -- despite the challenges in the broader market right now, we're in a good position with respect to our company to take advantage of any of those.

Do you have a leverage ratio target that investors should kind of keep in mind?

Well, on a gross basis, right now, we're about 1.5x levered. On a net debt basis, we're about 1x levered, give or take. So really, we're pretty close to our target right now. I could see us continuing to delever a little bit more over the coming quarters, which would then give us just that much more flexibility to add an appropriate amount of leverage for a large acquisition that might come along.

Got it. Maybe we can shift gears a little bit and spend a few minutes talking about some of the individual segments and opportunities here. Maybe starting with Power and Industrial. Since you talked about some of the renewables opportunities there, can we just talk a little bit about how that renewables opportunity has developed over time? And kind of where you see it going from here? I know you mentioned some chunkier solar projects, but what really are the key drivers here? And where do you see the opportunities going forward?

Well, the opportunities are very robust. We actually have to be very selective about what opportunities we're chasing because there are so many of them. You want to pair yourself up with the right client and we've been able to do that. That's really how we started. We started with one project, one project team and management team, and had a very successful project on the Midway project a few years ago. And then we've taken that client and then they've asked -- they've taken us -- asked us to take on other work and, of course, the reputation and experience. So it has started to sell itself a little bit, and we've been able to bring in and recruit additional management personnel with backgrounds and experience in renewables, certainly, the design and construction of solar facilities. And it's just grown. There's just -- there's numerous opportunities out there. We have to be real careful about growing too fast because the last thing you want to do is take on a project that you can't execute successfully because they have pretty tight time lines. And they need you to meet your schedule. So we do that. We're very disciplined about how we've added and how we've grown that business.

And what's interesting about those projects is they generally burn very similar to electric transmission projects from a timing perspective. Steve, as you know, $100 million pipeline job, we can burn in 5 to 6 months. $100 million electric transmission project or $100 million solar project burns over 18 months, for example. So they tend to be longer lived, which enables you to plan a little bit more about how you bid and how you start work in order to make it a little less lumpy.

Well, when I think about those jobs, too, is we'll have 3 to 4 to 5 and 5 Primoris companies doing work on that project. We're one of very few, if any, other contractors that can sell full -- almost full turnkey execution to a client. Partnered with it, we can do the beginning -- preliminary engineering to then where they can buy their equipment. We can -- we have a partner that we'll partner with to do the detailed design. We can come in and do the site work. We can do the roads. We can do the underground. We can do the electrical. We can do the mechanical installations. We can tie it to the grid and run the transmission lines to a substation that we can build.

And so -- that sounds pretty robust. And how -- since this business has historically been very strong in the gas-fired power plants, have you seen -- how smooth has it been in terms of transferring over the skill set from gas-fired to doing these renewable projects?

You don't necessarily take over the same management or labor. Now we can use the same management but they have to -- what we do is we bring them in with people that are experienced at building solar facilities. Because building a solar facility is a lot like manufacturing. You're doing the same thing 100,000 times. So you go on in and you drive 4-inch piles, you drive 500,000 of. And you run miles of cable. Now when you get into electrical cable and the terminations and pulling cable, well, that you can use electricians for. But really, a lot of it is -- you're not looking for that high-quality craftsman necessarily for us to be able to put these units together. It's just, where can you save seconds? Because if you can save 10 seconds on an activity, well you've got 200,000 of them to do, then that saves money.

Our most recent solar project that we're working on right now out in West Texas. We're installing 1.3 million solar panels. If you can save 60 seconds of the installation of every single solar panel, it's amazing how much it adds up in terms of labor save.

And that may just be a function of how close you put the pallets of panels to where they're installed.

Exactly.

Interesting. Well, let's move on from there to maybe the Transmission & Distribution business. How much of the opportunity set here is more kind of discrete sizable projects? And how does the pipeline of opportunities look there at the moment?

So most of our transmission substation work scopes are discrete projects tied to our MSAs. The pipeline of new projects is robust, particularly with one of our larger clients. And our bid activity is picking up as we look to broaden our reach with our T&S services outside of Texas. So we're seeing a lot of opportunity out there. Again, you're being selected. We're not going to go out there and take on a huge project, but there are a lot of opportunities for that group.

And Steve, just to add to that. While we do some T&S work, Transmission and Substation work, right now, the vast majority of the work that we do in that segment is program work. It's distribution work. So the opportunities that Tom is talking about to expand our presence in that area, Transmission and Substation, is growth.

Yes, 90% of what we do in that business is MSA work.

Got it. And so how important is it to, as you kind of broaden out here, to actually engage with a new set of customers?

Well, you never want all of your -- 90% or 100% of your work to be with one customer because if something can happen, you can -- clients change, their management teams change or something going to happen where you embarrass a client, you can -- in 30 days, they're going to have you off their job sites. We like having the long-term relationships, invite having the long-term relationships. We like having a diverse number of clients, of course. So we are looking at broadening that team's client base, and we're having some success doing that. We're looking at renewing another MSA with another one of their larger clients that will help us do that. But like I said, I don't think any one client wants to be dependent on one contractor, and we certainly don't want to be dependent on one client.

But within our existing customers, there's additional opportunities for further penetration and to get more work with them as well.

Well, just this one client, we just renewed this MSA with before the end of last year that they're just now -- we introduced to them the capabilities of our other companies. So now they're seeing whatever other companies can do, what services we can provide from some of our other business units, and we're talking to them about doing work for them in other areas.

Terrific. Maybe let's move on to the pipeline and underground business. There's certainly debate in the market today about what's happening now with the energy disruption that we've had. Now things -- oil prices at least have come back around to some extent. So can you just talk a little bit about what your customer conversations are like in this segment at the moment? And how they maybe evolved even over the last couple of months?

It depends if you're talking to a customer that has gas pipelines or oil pipelines or perhaps both. We haven't seen a lot of slowdown in the projects for gas pipelines. Oil pipelines, we certainly have. And of course, none of the projects that we were awarded have stopped. They've moved forward. There's a certain number of projects that these clients -- our clients and other clients have made commitments for. They've spent money buying right-of-way and materials, and those projects are moving forward. Obviously, you see the projects that have permit issues and there's a number of disputes going on and those projects moving forward will depend on the outcomes from there, including the ACP project. But we see more and more clients getting partners on prospective pipeline projects, so they don't take on all the risk. And we see more and more clients wanting to be quiet about the potential for projects and wanting us to be quiet, so that word doesn't get out. So we are seeing still quite a number of interstate or instate projects that are smaller projects, maybe not as many large cross-country or interstate projects.

And how do you think the NWP 12 situation is likely to affect your plans for this year?

I don't know if it will affect our plans for this year. Of course, we didn't have ACP in our plan anyway. If it goes, it will just be a plus. But if that stands, if there continues to be a problem, that just -- that might continue, it could certainly affect us next year. Certainly on the larger projects. It won't -- project force we have going on in single states or smaller spreads, not so much.

And do you have a sense of sort of what the opportunity set looks like, the potential to sort of backfill what you're doing this year, separate from ACP, the opportunity to backfill that over the next 1 to 2 years?

Certainly not 2 years. We're looking into next year. Again, there's -- we're bidding -- pipeline work is typically -- you go -- it's a quick burn, so you'll go from winning the work to move into the field rather quickly. I think we'll see more in the second and third quarter where we'll -- the types of projects is when we bid projects for next year. We start bidding projects that will be executed next year, and we'll see what those clients' appetites are or what restrictions or limitations they have from a permit standpoint. And we'll know more at that time what that looks like. There's certainly the potential for some of these -- the arguments of this permit dispute issues to affect us going into next year. And then we just -- it changes what type of work you pursue. You choose -- chose smaller projects in different areas of the country that don't have necessarily the permit issues. But we're not there yet.

Got it. Well, it looks like we're actually coming up on the time, but this has been really helpful discussion. And wish you guys the best of luck, and I hope everyone stays safe and healthy. And look forward to talking soon. If anyone has any questions that would like us to address, feel free to reach out, and thanks a lot.

Thanks, Steve.

Thanks, Steve. Appreciate it.

Thank you.