Primoris Services Corporation (PRIM) Earnings Call Transcript & Summary

Good morning. My name is Michelle, and I will be your conference operator today. [Operator Instructions] At this time, I would like to welcome everyone to the Primoris Services Corporation's Business Update Call. [Operator Instructions] It is my pleasure to introduce your host today, Brook Wootton, Vice President of Investor Relations. You may begin.

Thank you, Michelle. Good morning, and welcome. Joining me today are Tom McCormick, Chief Executive Officer; and Ken Dodgen, our Chief Financial Officer. Before we begin, I would like to make everyone aware of a certain language contained in our safe harbor statements. 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.

Thank you, Brook. I want to welcome everyone to this call as we share the news that we are adding Future Infrastructure to the Primoris family of companies. In our call today, we'll focus on the details of the transaction as well as discuss the strategic rationale behind the deal and our view of Primoris' strategic positioning once the transaction closes. As noted in our news release, we view Future Infrastructure as an exceptional fit with Primoris that accomplishes a number of our strategic goals, including accelerating our ongoing portfolio, transition towards higher-growth, higher-margin recurring revenue. Let me start by spending a few minutes walking you through the transaction details at a high level. If you look at Slide #2, Future Infrastructure is a leading provider of nondiscretionary installation maintenance, repair and upgrade services to the telecommunication, regulated gas utility and infrastructure end markets. As you all know, entering the telecom services market has been a strategic priority for Primoris for some time. This acquisition not only accomplishes that objective, but does so in a very meaningful way, establishing a new platform for Primoris in a dynamic market with outsized growth. The purchase price of $620 million includes significant tax benefits Primoris expects to realize both in the first year and over time, which is worth at least $80 million. We will be adding approximately $66 million of EBITDA on a last 12-month basis, and that is before the impact of synergies, which we expect will add a minimum of at least $10 million annually. All in all, this amounts to a last 12-month purchase price of approximately 7x EBITDA. This transaction was unanimously approved by both Boards of Directors and is expected to close during the first quarter of 2021, depending on the timing of HSR clearance. Now let me go into further detail on why this market and this company are such an outstanding fit for Primoris on Slide 3. First, the market, telecom services. It's not news that telecom services is a large, high-growth market that will continue to grow well into the future, riding the tailwinds of our increasingly digital world. The massive fiber deployment is underway to support last-mile broadband capacity, the Internet of Things, 5G technology, rule stimulus and monumental growth in data consumption bode well for a marketplace that looks to be in the early innings of a decades long, perhaps even longer investment cycle. We spent a lot of time with our customers, and we know they increasingly prefer to work with large sophisticated turnkey service providers as they consolidate their supply chains. This acquisition will give us an even larger footprint to provide specialty services to our customers. To organically build this kind of platform or presence in the telecom services market would entail a significant investment of, not just money and resources, but time. Making a sizable acquisition like Future Infrastructure allows us to jump-start our presence and avoid missing this opportunity. It is also worth noting that Future Infrastructure not only establishes a strong presence for Primoris in telecom services, it also further strengthens our existing utility capabilities. This transaction creates a number of cross-selling opportunities for our utilities and transmission segments from make ready and engineering to traffic control and restoration. Go to Slide 4, please. Now let's get into a little more detail on the Future Infrastructure business. 60% of Future Infrastructure's revenue comes from exactly the kind of telecom services that we see achieving such dynamic growth, from underground and aerial line placement to small cell installation, maintenance and upgrades. Another 25% of the business is in the regulated gas utilities sector, a market that is very familiar to Primoris and aligns well with our existing utilities segment. Much of this business is regulatory-driven and a great deal is related to the need for maintenance, repair and upgrades of our existing gas infrastructure. The final 15% of the business serves a variety of other infrastructure markets, which we think will be accretive to Primoris' existing service capabilities. If you look at Slide 5, when you dig into Future Infrastructure's primary end markets, you see the scale of the opportunity we're looking at. In particular, I would like to -- I would highlight that the telecom market is set to benefit from a significant multiyear carrier spend on the rollout of 5G. We anticipate this spend to be in the range of $30 billion a year just within Future Infrastructure's geographies, representing a huge opportunity for us. New networks are more complex than before, as a result, annual maintenance spend is expected to increase significantly. This creates an attractive steady base of high-margin work. Beyond 5G, there is expected to be significant spending required to keep up with substantial mobile data demand growth, IoT, smart cities network implementation and an increasing number of devices on the network, such as connected cars. On the regulated gas utility side, this market is facing 2 issues that drive opportunities for us: the first is aging pipelines. Nearly half of the current gas pipeline infrastructure in the United States was installed prior to 1980 and has a need of replacement and/or repair; the second is noncompliant iron, bare steel and copper pipelines. Nearly 100,000 miles of these pipelines remain in operation. We anticipate that the current replacement cycle of these aging and noncompliant pipelines alone will last 15 to 20 years, providing a huge pipeline of projects for companies like Primoris. If you go to Slide 6. Considering all the factors I just highlighted, it is clear to Primoris that this is the right transaction for us at the right time. Future Infrastructure is a differentiated market leader with an established reputation and brand supported by an unwavering commitment to safety. Adding Future to the Primoris family expands our total addressable market, while improving our existing utility services portfolio and providing significant opportunities for cost savings and cross-selling. Future Infrastructure enhance -- furthermore, excuse me, Future Infrastructure enhances our commitment to high-growth, high-margin markets while positioning us well with regards to additional MSA-oriented services work. If you go to Slide 7, geographically, Future Infrastructure's multiregional footprint is complementary to ours and strategically positioned for the demographic shifts we're seeing in the United States. Their service areas stretch from Georgia to Nevada with entry into North and South Carolina planned for 2021. Additionally, Future's strong brand and reputation are reflected in the blue-chip client base with relationships stretching back multiple decades. 93% of the company's revenue comes from repeat customers. The opportunity to migrate Future Infrastructure's services, business lines and customer base across Primoris' expansive existing footprint is a critical piece of this acquisition for us. It is exciting to imagine the potential Future Infrastructure can realize in both the telecom and utility markets once it is combined with Primoris. Looking at Slide 8, importantly, Primoris and Future Infrastructure are not only a strategic fit broadening the opportunity set for both companies, but there is also a strong cultural fit. We compared our organization's core values. We found them closely aligned. Both organizations are passionate about safety and dedicated to quality. A key determiner of the success of any acquisition is its culture, and we believe our organizations will meld smoothly in this regard. We believe our employees are our greatest assets, and we just added approximately 1,100 variable -- very valuable assets for Primoris. We look forward to welcoming the Future Infrastructure employees into the Primoris family of companies and driving the combined business forward together. I will now turn the call over to Ken to walk through the financial aspects of the transaction.

Thanks, Tom. As Tom mentioned earlier, this acquisition is for a total cash purchase price of $620 million. The acquisition will be funded by $400 million of debt via new term loan, primarily from our existing bank group, $100 million from our revolving line of credit and $120 million from cash on hand. The acquisition is expected to be accretive to earnings in the first year and will enhance our pro forma top line growth, gross margin and EBITDA and free cash flow generation. Primoris anticipates significant tax benefits arising from the transaction with an expected net present value of at least $80 million. We are also expecting annual cost savings of at least $10 million through a combination of cost reductions and synergies that will be realized over the next 24 to 30 months. Primoris' pro forma net leverage will remain comfortably below 3x net debt-to-adjusted EBITDA for the last 12 months ended September 30, 2020. Turning to Slide 10. From a financial metrics standpoint, you can clearly see why we're so excited to add Future Infrastructure to Primoris. Total revenue was $244 million in 2018, $319 million in 2019 and the last 12 months ended September 30, 2020, revenue was $342 million, demonstrating the steady growth in this business that Tom talked about in detail. EBITDA has also grown substantially over the last couple of years and stands at $66 million for the last 12 months ended September 30, 2020. With the approximately 19% EBITDA margins, it will be very accretive for Primoris, and we are excited at the opportunities we have to potentially drive that margin profile even further. Future Infrastructure also has a compelling CapEx profile with strong cash conversion and minimal maintenance CapEx. The bulk of Future's historical CapEx spending has been to drive growth, and we see this as a real opportunity to invest our money wisely and reap the benefits of building from within. As we turn to Page 11, we look to the future of Primoris. You can see how our revenue and gross profit mix has shifted with the addition of Future. Our strategy has been to move away from our lower-margin business segments and focus on higher margin work and increasing our recurring MSA revenue. We have increased our utility-driven revenue to 46% with the acquisition of Future Infrastructure, and our gross profit mix has seen a similar transition. After the acquisition, utility-driven gross profit is projected to be 48%. We will also be effectively reducing our risk by decreasing the overall project ticket size, all while meaningfully entering into a new market in telecom. And with that, I'll turn the call back over to Tom.

Thanks, Ken. In summary, this acquisition checks all the boxes for the M&A criteria Primoris has previously laid out. We have stated for the last 2 years that we see the telecom market is the right adjacent market growth opportunity. Future Infrastructure kind of pulls us into that market. We know we want to continue to leverage the value of our brand, our strong customer base and our expertise. Future Infrastructure allows us to do that through cross-selling complementary footprints and alignment with another strong brand that also has long-standing client relationships. We want to invest in and expand higher-margin businesses. Future Infrastructure has exponential potential for high margin growth. We are looking to upgrade our portfolio toward more MSA-oriented services, and that is exactly -- that exactly describes Future Infrastructure's business model. And last, we are working to pivot away from pure engineering and construction towards -- toward a higher-growth, higher-margin portfolio. Future Infrastructure accelerates that pivot. As we said at the outset, it is an extraordinary fit and a defining moment for Primoris, and we couldn't be more excited to announce this acquisition. Now I'd like to open the floor for questions.

[Operator Instructions] Your first question will come from Lee Jagoda from CJS Securities.

Congratulations. So why don't we start with the easy stuff? Can you kind of give us a little bit about how the transaction came together? How long you've been looking at it? Was it an auction? And maybe any reasons you think why Tower Arch would be selling today?

Well, we've been looking at it for a couple of years. As you probably know, and you and I have discussed, this is a market we've been trying to get into for a while. I actually started talking to their CEO last year and it -- about this time last year, found out they were going to go into a process, which they did. They entered into a process towards the beginning of 2020 and then it was delayed. So we started getting into the process. It was delayed due to the pandemic, and we just stayed in touch. When they opened the process back up, we spent a lot of time working with our Board, convincing them this is the right acquisition for the company, the right move, and we stepped into the process, and we're successful. And I think they're trying to -- I think their decision to sell was just because I think they've owned the company since, what, 2013?

Yes. They -- Lee, they've been into it for a while. And you know the normal lifespan of a private equity group. So this is just a natural jumping off point for them.

Got it. And then -- so I guess, switching to the business. If I look at the historical growth rate, you gave us the 2 years. Can you talk to maybe a little more than just 2018 and 2019 and maybe the mix of organic and inorganic? And to the extent there was material inorganic growth, can you kind of give us a time line of how that came together?

Yes. I don't have pre-2018 in front of me, but it was probably low 200s or high 100s or something like that. Typical PE model, Tower Arch bought the platform back in 2013, 2014, like Tom mentioned. And the entire time they've owned it, it's been a combination of organic growth and acquisitions. I don't have the exact breakout here, but I would say, on average, over the course of the past 3 to 4 years, it's probably been a good solid 50-50 split between organic growth and acquisitions. And now they've done a good job of doing kind of the first phase of integration. And so we'll have a little bit of work to continue integrating them, which is where some of the potential for cost synergies will come from. And our focus right now is just going to be on organic growth going forward.

Got it. So fair to say if it's a 50-50 split, that's sort of the organic growth you would expect out of the telecom end market, and this business is somewhere in the low double digits, low teens range going forward?

I think that's right. Yes.

Yes, that's right.

Okay. And then just lastly, and I'll hop back in queue. Looking at the EBITDA margins, they're very impressive and certainly above yours and other public comps, even in the telecom space. Can you talk about the trends there and why these guys have such good EBITDA margins and really what makes them special?

Yes. Look, I think the strong EBITDA margins are because they're not just doing the installation, they're doing a combination of installation and maintenance work and call-out work in order to do repairs on that type. And so I think that's driving the higher margin here. And we think that's a good combination. Frankly, that's where we like to be with respect to this type of business is we want to be, not only doing the new installs in the new geographic areas and the upgrades to the small cells, but also doing the ongoing maintenance work, which creates that good reoccurring base, as you know, we like.

Yes. Lee, their business model has been to go in and do the installs and then stay in the area, maintain a relationship or develop a relationship with that client and then to provide all the maintenance services that they need. So all the callouts, anything that happens on weekends, holidays, someone hits a pole, knocks a small cell down, and they make -- that drives a little bit higher margins. But they're there for those clients. A lot of companies, a lot of competition going, they do the installs and they leave.

And your next question will come from Sean Eastman from KeyBanc.

Congrats on the deal. I love a Christmas acquisition.

Yes. Nice Christmas gift.

Yes. So I guess just going back to the margins, I mean, over 19% over the last 12 months, is that sustainable? And it would be helpful if maybe you could break out the margin profile of the telecom piece versus the gas utility piece versus the other services piece, just so we understand the delta between the sort of subsegments there?

Tom, you want to go? I don't know that we -- yes. Sean, I -- just to answer part of your question first before I turn it over to Tom. Sorry, I don't have the margins on each of the individual pieces in front of me right now, but they're very comparable margins on the gas side to what we do right now. And on the other business as well.

Yes. If you look at their business, 60% of their business is telecom. The other -- the another 26% is the regulated gas utility, very similar to the type of work that we do. And then they had the last 15% is our other services, and these are primarily relocating utilities and doing different works in the -- I'll say it's civil, but it's not the civil that you're used to when you talk -- when think about us. These are really moving utilities and services for clients, water, sewer, telecom-type stuff for clients for all sorts of reasons.

So I guess, just going back to the question, I mean, it is that sort of over 19% EBITDA margin, how we should think about the next couple of years for this business? I just wonder, maybe with the geographic expansion plans, is there a drag on margins as those new geographies gain scale? Is there anything sort of unsustainable in that performance we're looking at over the last 12 months, just given it's so much higher than consolidated prem margins?

Well, I think once 5G's ramps up and continues to ramp up, and as I said earlier, there's probably decades-long balance of work in that. Yes, though the advantage that we have is our footprint. So the -- where they have had costs where they're moving to a new market, they got to run facilities. They've got re-leases and everything else in a lot of these locations. We'll pull them into markets that we're in. So again, although there'll still be start-up costs that may put some pressure on the 19% EBITDA. They won't be as significant as just moving into a new market. I mean, our -- because we pretty much stretch across the U.S. now. So one of the things that we thought was attractive is that we could use those as launch points for bringing their business into the -- some of the other markets that we're in.

Okay. Got it. And could you tell us what the total backlog of Future is and where that sits on a year-over-year basis?

Yes. $350 million, roughly $350 million.

Okay. And is that up year-over-year?

Yes.

Yes.

Okay. How much?

It basically follows their revenue growth, right, because they're -- almost all their revenue is under MSA recurring contracts like our MSA revenue. So it basically is up from their 2019 revenue.

Okay. Got you. And okay, and then I'm just trying to understand the tax benefit. Can you just give me a little more color on that and maybe what this pro forma combined tax rate for Primoris is once you fold this in?

Yes. So the tax benefit is coming from the fact that they are structured as an LLC. So from a tax perspective, we're getting full stepped-up basis on all the assets at closing combined with the fact that I think you know this already, for a -- from a tax perspective, even the goodwill is deductible over 15 years straight line.

Okay. So pro forma combined tax rate?

Probably still be in the 28% to 29% range. So what we're looking at for next 2, 3 years.

Your next question will come from Brent Thielman from D.A. Davidson.

Congratulations. I wanted to dig a little bit more into the telecom services business. Is the business more wireless or wireline focused? I mean it sounds like it's a bit of both.

It's both.

Okay. And I mean, is 1 area or the other been growing faster for the business over the last couple of years?

No. I think it's been growing equally as fast on both sides just because there's so much going on there.

Okay. And is it not to think too far ahead, and congrats on getting the deal done, but if you -- as you think of this as sort of the initial platform, do you need to do additional deals to sort of expand the geographic footprint into some of your existing service territories? Or can you use what you've got here to move into some of your other markets?

I mean this helps a lot. This is a really good way to jump-start us into this market, but we're going to continue to look at other opportunities to make strategic acquisitions that will help continue to grow these businesses. I mean that's one thing that Future has done. If you watched -- if you look at how they grew, they grew very similar as to how Primoris grew through acquisitions over periods of time. And we'll still do that. They may be smaller. It just depends on the location and what we're looking at. Obviously, it will be smaller than this one for the time being.

Okay. And do you guys need to inject any additional capital or meaningful capital for fleet, equipment upgrades, things like that?

No. They're -- actually, their fleet look to be in very good condition. They get -- they have some businesses they bought in the last few years that maybe their fleet and their equipment is a little bit older, but still it was still in very good condition. I think their capital spend, $15 million to $20 million a year, which is pretty much in line with other business units that we have that are this size.

Okay. And then maybe last one, Ken. Do you think you can kind of maintain this, call it, that 6% SG&A level going forward as you integrate Future, backing out anyone that -- with all the onetime acquisition costs stripping that out?

Yes. I think -- well, I'll say and answer and then I'll let Ken correct what I say. But, yes, I think we can. Actually, I think this will help us do that. I think there's some synergies here. The fact that they're here in Dallas helps as well. And there's some opportunities for us to realize some further savings. And so I think we can do that. I really do. We'll be sitting right at 6%, maybe just a little over or a little bit below.

Yes. And ideally, over time, we continue to drive that even a little below 6% as we leverage the economies of scale with this acquisition coming in.

And your next question is from Adam Thalhimer from Thompson Davis.

The -- can we just focus on the '21 accretion real quick and make sure we get that nailed down? I mean, what do you think for EBITDA next year? And then I know it's way early, but EPS, if you have any idea.

We don't have EPS yet. No. EBITDA next year is probably going to be very similar. It's -- revenue is probably going to be up next year is our guess. We're still finalizing our plans, but even just round up the $350 million of revenue for next year and hold the margins flat, I think that's probably where it's going to be, in that 19% range.

Got it. Are there any large contracts that are kind of coming up/rolling off? And then at the same time, is there anything you are looking at that they're bidding on that gets you excited for growth over the next few years?

Well, there -- okay, so I'll answer your second question first. The answer is yes. As a matter of fact, this is catapulting. Our leadership team and this -- Mike Christy, who runs this segment to these -- that will fall under. And their leadership have already out contacting clients today and already getting positive feedback about opportunities this is going to create. So -- yes. I think there's tremendous amount of opportunities for us to pull them into markets that we're in, and they were actually going into some markets and we can actually help them accelerate that. Now you're -- now what was the first question? I'm old, I forgot.

I was just curious if there was anything -- if they had any kind of 3 -- 2 or 3-year contract type of thing, and this was the final year.

Thanks, Adam. No, they don't. They don't -- it's not -- we don't have the same circumstance we had with Willbros. It was critical that we got that contract extended. They do not. We have a big effort starting this morning, obviously, to go out and reach out to their key clients. I think they probably already started doing that. And we will do it as well with them. So -- but we don't expect to -- we don't know of any new contracts that are -- they're waiting to renew, and feed -- we expect all the feedback to be positive.

Okay. And then I did just want to touch on the valuation again, right? Because you're paying half the market cap at Primoris for about 10% revenue growth. I'm just curious how everybody got comfortable with that?

Yes. I think we got comfortable, first of all, by the fact that the EBITDA is so much higher than our average business. And the tax benefits that came along with it and really just a higher growth profile. And the fact that this is one we felt like was worth stretching for a little bit in order to really get us into this space in a meaningful way. And I will tell you, all the way up to the Board, incredibly supportive of us as a management team. We collectively worked very well together, not only amongst the management team, but also with our Board, and this came together very nicely. So we think this is going to be a really good deal for us going forward.

Okay. I do like that slide about the 48% utility. That was a good one.

Yes. We like it as well.

And your next question will come from Julio Romero from Sidoti.

Congrats. So did you call out the interest expense on the new term loan? Just trying to get a sense for what the new kind of quarterly run rate would look like on interest post-close.

No, we didn't call it out. We haven't closed yet, and we're finalizing all those documents with our bank right now. But our borrowing rate is really nice. I expect the interest on the new term loan to be somewhere in the 3% to 3.5% range.

Okay. And I guess someone asked earlier, but I'll ask it maybe another way, like you mentioned this is a platform for growth, and it's really early, but you mentioned that Future should have some strong free cash conversion. I guess longer term, is your capital allocation kind of going to be oriented towards kind of debt reduction or maybe what does your longer-term leverage ratio look like?

Yes. I mean, longer term, our leverage ratio is going to gravitate back down to really kind of where we are now, pre-deal. That's our goal. We're focused very much on supporting the business, the working capital needs and the CapEx needs, like we always do. And then any free cash flow above and beyond that is going to be focused on debt paydown.

Yes. Pay down debt.

Okay. And maybe last one for me is, can you give us a sense of what D&A looked like over the last 12 months?

What -- I'm sorry, what looked like?

Trailing 12-month depreciation?

Depreciation. Julio, I don't have that number in front of me. Sorry.

[Operator Instructions] At this point, I have no further questions in queue. I turn the call back over to Mr. Tom McCormick for closing remarks.

All right. Thank you, Michelle. Again, as I said earlier on, and Ken has just restated, this is a very critical, very important acquisition for us. We're excited about it. We think, together, these 2 companies can do a lot. We're looking forward to working with the Future Infrastructure management team and their employees and growing these companies in the future. I think it's -- the entry into the telecom market is a great opportunity for us. I think it shows a very promising future for Primoris. And it's right where we want to be and what -- exactly what we've been talking about for the past couple of years. So thank you for joining us, and I wish everybody a happy holiday season.

Thank you, everyone. This will conclude today's conference call. You may now disconnect.