Primoris Services Corporation (PRIM) Earnings Call Transcript & Summary

Good morning, and welcome back to Day 3 of Morgan Stanley's Virtual Laguna Conference. My name is Matt Sharpe, and I'm the firm's Government and Engineering Services analyst, and it's my pleasure to host the team from Primoris Services CEO, Tom McCormick; and CFO, Ken Dodgen. Now before we get started this morning, I do need to read some disclosures. For important disclosures, please see the Morgan Stanley Research Disclosures website at www.morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. With that, Tom, Ken, welcome, and thanks so much for joining us this morning.

Yes. Thank you, Matt.

Thanks, Matt. Happy to be here.

Tom, I just wanted to sort of start this discussion off at a high level, maybe can you level set the audience on the Primoris story, what does the company do? How has the company evolved, maybe key capabilities, customer mix? Anything that you think might help people understand the composition of the business today relative to, say, 5 years ago?

Sure, I'd be happy to. Primoris has changed quite a bit over the last, I'd say, 5 to 7 years, if not even more recent, Matt. We are a diversified specialty contractor with roughly 19 business units operating in multiple markets across 3 segments. And those segments are Utilities, Pipeline Services and Energy Renewables. And what I mean by diversified specialty is that we have businesses that operate across multiple markets, including solar and other renewables, water treatment, electric transmission and distribution, including the design and construction of substations, gas transmission and distribution, the design and construction of highways and bridges, communications, the design and construction of industrial facilities, the construction of power generation facilities, pipeline integrity and on and on. This diversity reduces the risk of serving a single market, and our services are closely linked enough that we can cross-sell and if the circumstances are right, we can also take resources from 1 business and deploy them to other businesses within our 3 segments in response [Technical Difficulty]. And our largest hubs are spread across the United States, in Texas, California, Louisiana, Minnesota, Florida and Virginia. So there's nowhere in the lower 48 states that we can't send tools, equipment and resources to address the clients' needs. We also have operations in Western Canada as well. In addition to our specialty contracting services, we also provide maintenance and integrity management services for our customers, typically through master service agreements, which drive recurring revenue and long-term customer relationships. Our customer mix includes private industrial clients in markets from traditional energy and power to renewable energy and communications and then public works and other governmental entities such as the Department of Transportation and the U.S. Army Corps of Engineers as well as municipalities. I hope that kind of brings everybody up to where we are and what we do.

That's fantastic, Tom. I mean it sounds like quite a diverse business in many regards. Just given that diversity and specifically the diversity of your end markets, I want to spend some time discussing where you see growth and where you're seeing headwinds? Maybe walk us through that dynamic, if you would, on a segment basis?

Sure. We spend a lot of time and effort just trying to look at where we're going and where we see the opportunities for us. I'd be happy to do that. We're positioned to take advantage of the long-term growth opportunities in the renewables, electric utilities and communications spaces. So let's start with those. These are markets which we believe will see significant investment in infrastructure over the next decade. Although as you well know, we are also positioned to benefit from infrastructure setting for highways and bridges as well as water treatment facilities and pipeline safety and integrity. In our Energy Renewables segment, the renewables market has definitely come into its own and is now over $225 billion market. It certainly is a growth area for us, especially solar projects. Heading into the second quarter, we had over $428 million in backlog for work associated with 2021 and 2022 solar projects. We're now targeting $3 billion of solar projects in this market and expect this business to grow at a steady pace for the next 3 to 5 years and even longer. We just don't look out that far. I'll tell you, our biggest challenge is to continue to be disciplined in pursuing solar opportunities. We're building project teams just to serve the clients we are serving right now. We spend time and money to train them on current projects to do the job the Primoris way, and it shows just in their performance. Our customers are locking down project teams, 3 projects out and over multiple years. Some are even scheduling their projects such as the same project Primoris project teams can go from 1 project to the next. So they go from start to finish and start to finish. Beyond solar, we have other renewables activity, and I'll point specifically to our expertise in hydrogen, which is gaining traction because it has 0 emissions when it's used as a fuel source. We have over 25 combined years of history and expertise working with hydrogen, typically generated through steam methane reforming. So this is now what is called gray hydrogen -- referred to as gray hydrogen. And the reforming process does create carbon emissions. One of our engineering teams is currently working with clients to explore blue hydrogen, which includes carbon capture, which creates additional opportunities for us. In addition to the items that I just mentioned, we're also working with clients in green diesel, biofuels, renewable natural gas and carbon capture. So the term renewables for us extends beyond just what we're doing in solar. Then there's the utilities market. The digital future runs on electricity. So hardening and expanding the capacity of our electric grid offers multiple avenues for growth for Primoris. Transmission and distribution alone has a market opportunity of $70 billion, and that doesn't include the pending infrastructure bill that is allotting an additional $73 billion of investment. The electric utilities also has the tailwinds from what is known as DG or Distributed Generation growth and solar as well as wind facilities. All these create electricity that needs to be connected to the grid and transmitted. So more of these projects include substations and electrical transmission, which fall right into our wheelhouse as well. Communications space, which we include in our Utilities segment has 1 of the highest growth opportunities due to the rollout of 5G mobile wireless networks. Our acquisition of Future Infrastructure in January of this year has catapulted us into this market. The communications market has a market potential over the next 5 years of over $140 billion and who knows how big it will be beyond that. And this will extend beyond that period of time as well. So there's a lot of tailwinds on communications. We layer on top of that the $20 billion market opportunity of the rural digital opportunity fund known as RDOF. To the date, we've secured 2 5-year communications projects under the RDOF program which totaled $100 million to install fiber in the Gulf Coast region, and we are actually pursuing additional work in this market. So you asked about headwinds, and I'll say we've encountered some of the utilities market this year as there has been a bit of a lag in our clients releasing projects in the first and second quarter. For example, COVID restrictions in the workplace, slowed engineering and permitting and created what we call the COVID hangover, so things didn't get handed off to us as quickly as we thought it would. The year didn't kick off and launched that business as fast as we had hoped it would. We also had some issues in the market due to supply chain delays, but we believe that we and our clients have learned how to work around those supply chain issue, although it hasn't yet been completely resolved. That being said, we're back on track now in seeing that customers in this market are issuing work and moving closer and closer to business as usual with possibly even more work to get done as the year progresses. Talking about headwinds, weather is always a potential disruptor for us and for some of our businesses. But this year, the winter storm that occurred in February stopped all work in this market. And when I say this market, I'm referring to Texas for approximately 10 days due to temperatures in the State of Texas dropping to level of 0. Then we had to deal with 42 inches of rain during Q2 that played havoc with our work schedules and caused additional delays in realizing revenue for the quarter. I've talked about electric and communications and the opportunities we see there. Gas distribution is a little bit more established. So the opportunities there are more for replacement and upgrades and also expansion, developments and people moving across the country to different locations, there's also opportunities there as well. There's a steady flow of work and some opportunity for continued growth, but that same dramatic opportunities as communications, electrical transmission and distribution don't necessarily apply to gas distribution. Our third business segment is Pipeline Services. We're seeing consistent bid activity from our established customers in recent weeks and probably recent months, even though the pipeline construction market remains extremely competitive and much lower when compared to last year. But I do want to highlight that last year was a record year for this segment with 900 -- a little over $900 million in revenue. And typically, we're about half of that. We see a number of larger projects coming out now, although it's been really slow and most if not all of those projects are slated for 2022 starts. Luckily, we had a large backlog of work coming out of 2019 that extended into through 2020, and we have benefited by positive outcomes in several project closeouts over the course of the year. We continue to reposition this segment to take advantage of our pipeline integrity, maintenance and field services capabilities in order to help our customers complete the work that they need to get done in order to meet current operational and safety requirements. And I want to say historically, field services has been anywhere from 25% and the integrity work has been 25% to roughly 30%, Kenneth, correct me if I misspeak, of that business's annual revenue. Another thing is carbon capture is in its infancy, but it will certainly result in significant opportunities for both our renewable -- our energy and renewable segment as well as our Pipeline segments in coming years. We're currently talking to several clients about their respective carbon capture projects. So there's opportunities there for us as well.

You mentioned a number of tailwinds there across the segments. And I want to sort of stick in that vein and discuss 1 that comes up quite often, and that's the infrastructure bill. It's obviously an opportunity for the company. What's your expectation? And what is the benefit to Primoris. What does that look like? How will it materialize?

Well, I'll tell you the faster that thing gets passed and we understand what it includes and what it does include will be good for us. But there's definitely opportunity in bill. My understanding is bill passed the senate as a bipartisan action and it's supposed to be voted on in the house I think by September 27 or certainly by the end of September. We're absolutely keeping a close eye on this. We have contacts in Washington, D.C. that keeps us updated on it. And that -- budget reconciliation bill. So within the infrastructure bill, our energy and renewables segment, which includes our Civil business, especially be affected in a positive way by the opportunities related to roads and bridges well as the opportunities to continue to present themselves with respect to renewable energy, which we've just talked about. And again, that includes solar, renewable natural gas, green hydrogen, blue hydrogen, biofuels as well as water and wastewater treatment. In our Utility segment, which includes Future Infrastructure, is well positioned to participate in the broadband infrastructure investment component as well as electrical transmission and distribution expansion, including grid hardening. And there are even opportunities for our Pipeline segment under the allotment for cap -- for pipeline and hazardous material safety administration as well as carbon capture. My understanding of the budget reconciliation bill, it also has some positive implications for our businesses. I understand that includes a major extension of tax credits for solar, fuel cell and carbon capture and institutes a direct pay for tax credits, providing owners with immediate cash benefits if they may consider accelerating projects in these areas, which will help us also build backlog and win work.

Fantastic. It sounds like a pretty apparent opportunity and I think all eyes in the coming weeks will be on that, Bill, as it progresses, that's it. Maybe we shift gears here and talk a little bit about profitability, margins have had some hiccups, but generally speaking, been pretty steady in recent years. And I want to talk about the opportunity to expand them. What are the levers that you have to pull on or what opportunities are there to actually expand and see some upside from here?

That's a very good question. We've really been working hard over the last several years to be more and more disciplined, more and more consistent about how we execute our work. We've been strategically shifting our portfolio to higher margin, higher growth projects, which include electric utilities, communications and renewables. With our new acquisition into communications, we have -- we've begun expanding into new geographic areas for Future Infrastructure but established areas for Primoris. We already have a presence in a lot of the areas that we're moving future into. Our renewals, particularly solar is one of the fastest-growing industries in America, and we've continued to expand this segment. As I noted earlier, we are very careful about the lump sum work that we do bid. We want to make sure that we can get our arms around the scope of the project. And it is something in which we have an expertise. So we've developed a lot of discipline around even bidding lump sum works, becoming a smaller and smaller part of our scope or our slight workload or backlog as we continue to grow as a company. Although there's still risk with lump sum projects being disciplined in our approach to determine projects we bid and how we estimate schedule and execute them, it's proven to help most of these projects be successful for us and our clients. And in 2020, if I'm not mistaken, only 22% of our work was done on a fixed price basis. And again, our average project size is less than $4 million, which also helps minimize risk.

You mentioned backlog there. And I just want to drill a little bit deeper into the dynamic that we've seen at play here over the last few years. If I look at the absolute value of backlog, it's trended sideways for, call it, maybe 3 years, 4 years. That can be, I think, a little misleading if you look at it on the surface. What's been driving this dynamic? And why shouldn't we be concerned or why shouldn't we view it as maybe a risk?

Well, our strategic move towards multiyear MSA recurring work compared to multiyear fixed price contracts, which you typically see in pipeline and see a little bit heavy and see in Heavy Civil works because almost every single projects go across multiple years. When we signed a 5-year MSA agreement, we only put our expected work for the next 12 months in backlog versus putting the entire 5 years or even 3 years as some of our peers have done into backlog. If we had a fixed price contract that was scheduled to extend over a 3- to 5-year period, we'd still place the entire value of that fixed price contract in backlog. MSA is different. So right now, approximately 52% of our backlog is MSA related. And we have a very conservative approach to booking backlog, but it's what we've done for years, and we want to remain consistent with how we do it. So as more and more of our backlog becomes MSA, again, 2 years ago, we signed a multi -- a billion dollar MSA contract with a key client of ours in Electrical T&D. We booked $200 million.

Got it. Got it. That's good insight and helpful color there. I want to key in on something you said for a moment. So 52% MSA. Now if I think about the broader E&C space, it's always drawn some concern from investors given situations over the years where a company has either become distressed or a project has gone against them, and it's caused some trouble in the P&L. So maybe what steps have you taken to reduce risk in the business?

First of all, I'll say, hey, man, because I am -- I am with them. We spent a lot of time just trying to derisk our businesses and lump some work is still a lot of our services that we provide and the type of contracts we take on. So derisking has been a major theme in our strategy over the last several years. I mentioned master service agreements or MSAs earlier. We have spent a great deal of time over the past several years nurturing this side of the business to generate recurring and predictable revenue. At the end of the second quarter, approximately 40% -- 43% of our revenue came from recurring MSAs, and most of this was in our Utilities segment. Our MSAs, as I noted earlier, usually 3 to 5 years in length with strong margin profiles from established blue-chip customers with whom we have long-term relationships. We also leverage our established MSA base to go after our other project work with the same clients. And we're working for a client under a MSA. We're also there when other projects come along, and we have an opportunity. We get exposure to them. We have knowledge of them. Because we're there and have a presence there, it gives us an opportunity to bid for that work, which is great. As we've noted numerous times over the past several years, our average project size is less than $4 million. Most of our projects are under $2.2 million. And actually, in reality, probably the majority of our projects are $1 billion or less. We don't take on large lump sum project unless we get our arms around the scope of the work and know that it's within our wheelhouse with respect to our experience and capabilities. Very -- 2 or 3, if I guess, Pipeline and Heavy Civil are 2 of the markets that I know -- businesses I know that we bid lump sum work. And we really have been really disciplined over the past several years in Heavy Civil. And you can see in just the results, how they've gone as far as being pretty consistent with how we evaluate their bids, how -- the projects they go after, what separates them from a pricing standpoint. And they've been very successful. And they're hitting their margins. Although it's a low-margin business for us, they're still doing well as has pipeline for the majority of their work unless they've been affected by weather. So the other thing we've done is our diversified specialty identity. As said this mitigates our risk across the multiple markets and across both public and private entities. Being diverse is sometimes can be a struggle, but if you get away from the up and down in some of these markets.

It seems like there's some real tangible steps that you guys have taken along the way. And as you mentioned, they're starting to bear fruit here. Part of that is intertwined with some of the acquisitions you guys have made. And so I want to pivot to just that. You made some interesting acquisitions in recent years, Future Infrastructure, in particular, one of the more recent ones. Can you talk a bit more about that business, why you did the deal and how it's performed thus far?

Yes, I would love to. We're still very excited about having been successful in the acquisition of Future Infrastructure and think it's going to pay dividends and give us a growth platform for years to come. As to why we did the deal, I talked about how the communications space is one of the highest growth opportunities due to the roll out of 5G. We talked about RDOF. Communications is also one of the highest profit margins for Primoris. So there's that. And Future Infrastructure is our gateway into the communications industry. It also gives us the ability to expand our other utilities businesses throughout all the regions we serve as well as continue our transition towards MSA or reoccurring services. The integration of future is actually a little bit ahead of schedule, which reflects the benefits of having a detailed integration plan and a dedicated team as well as similar values, safety culture, quality standards operational synergies. The onetime issues that impacted their business in the first and second quarters pretty much behind them now. The workload is starting to pick up, and they're performing at the levels we anticipated when we made the decision to buy them. We continue to work towards expanding Future Infrastructure across our national wide footprint that we're moving them into markets in which we have other offices and facilities and we have clients that have a demand or a need.

Given what you guys have done in recent years, future, some of the other interesting transactions and how you've sort of deployed capital with a focus on just that M&A. Maybe you could give us an update on what the M&A pipeline looks like today as well as how you're thinking about the broader capital deployment strategy here?

Sure. We still have 2 focuses. Our 2 focus are going to be on continuing to support our organic growth because we want to continue to grow organically as well as considering acquisitions where we find good acquisition places that are in line with our growth strategy. So we have a number of businesses that we operate. We're perfectly fine with them continuing to grow organically, but albeit very slowly, if at all, as long as they continue to perform and make money. But we have specific targets in areas in which we know we can grow, and we're concentrating in those areas. And I've talked about the business areas where we see growth opportunities, right? So -- but I will point out that we're very strategic and very disciplined about our acquisitions. We're also committed to investing both working capital and CapEx to support our organic growth, as I said earlier. There is a cost associated with moving business lines into new markets like we're currently doing with our various utility businesses. So we're moving T&D into different markets as well as moving future communications into other markets. And there are really another markets that we're looking at and we wanted to go is gas distribution. So it certainly benefits us to already have presence in those locations in which we move them. And so when we do have an office or a facility or a yard, there's some cost savings, but there's still cost of entry that occur and it typically takes a period of time for those investments to begin being profitable. So we go into the market, we have an office, to say, we have a T&D office, and we have a client in the area that we know that has a need for communication services. We'll start seeing that with crews and equip, which include personnel and equipment and tools. There's a cost to that, right? We don't have to necessarily run a facility or run a yard because we already have one there, but it does take a while for them to learn the clients' needs, work activities, the requirements, and it takes them a little time for them to be profitable. There's still those cost of entry. At the end of the day, when you can enter into a long-term MSA with that client because you've proven your capabilities to them and that you're reliable for them, it just pays dividends in the long run.

Got it. Why don't I just take a moment here to jump over to the Q&A portal. We have some questions sort of related to capital deployment and cash generation. So the first one I want to bring up is this. The Board authorized a small repurchase program earlier this year. Has the company been able to take advantage of the recent price dynamics -- stock price dynamics in the market and to what extent?

Yes. I'm going to let Ken talk a little bit.

So we actually authorized a share buyback last year that expired at the end of December 2020. The Board currently has not currently authorized a share buyback for this year, although they're continuing to watch stock price and continuing to talk with us about the possibility of adding one. So we'll see what happens in the next board meeting, but currently, we don't have an outstanding.

It will probably be on the -- definitely be on the table for the next board meeting depending on where we are on the stock price.

Great. And then just another one here from the portal. You mentioned winter storms in Texas that occurred earlier this year. Can you give us any update on any impact on either Hurricane Ida or tropical storm Nicholas, how that might have impacted your business?

Well, the only thing I can tell you, right now is we have -- we're involved in the recovery and reestablishing electricity and power for all the clients for the different utilities within those areas. We have roughly 262 full-time equivalent employees out there working 16 hours a day, doing the best they can to be safe and to reestablish power and utilities for everybody down there. But right now, that I know none of our -- really, our business has been affected, although we have had projects that had to shut down for a few days and let storm go through. There's a little cleanup that's associated with that, but it's just too early to really see what that has done. But again, 260 people out there, and I would imagine they're probably going to be out there for at least another week maybe longer.

Sure, sure. Should we think about this as potentially an opportunity to accelerate top line going into 4Q, given some of the damage in repair work or maintenance work that might be necessary?

No, I couldn't tell you at this time. It would be really difficult to tell because what that does is those crews that I've sent out there and that are working, they're working extended hours, but they're also not performing the work that they would be doing here while they're out there trying to reestablish power.

Got it. Got it. And then -- absolutely, absolutely. And then maybe just one last one from the portal here, if I could sneak it in. I know we're getting up against our stops. The question is this, you mentioned all the Willbros projects expected start next year, are you able to ballpark what percentage is either under protest or has some activist or environmental dynamic to it? Or what color can you provide around that?

I think you're speaking to the Pipeline -- projects for the Pipeline segment? Is that what you're referring to?

I believe that's what the client is referring to you, yes.

Willbros, we never bought their pipeline, but we'll talk about pipeline. So no, I don't really know. I really don't know. I know what we're seeing is the some of the projects are a little bit longer. Certainly, when you start looking at carbon capture potential for those projects, going to be longer runs of pipe that may be all interstate, smaller diameters because you just don't need it. But there's opportunities with some larger projects, but I don't -- I couldn't tell you where they are in filing process for their permits. A lot of -- I know that a lot of clients are looking at projects where they're pulling out old pipe and replacing it with larger diameter pipe where they don't have to go to FERC for permits. But I don't know what that is as far as the ratio of the work that we're pursuing.

Got it. Fair enough. Appreciate the insight there. That said, Tom, Ken, I think we're up against our stops time-wise, really appreciate the time. This has been a great conversation and really helpful to tee up the opportunity here at Primoris. So thank you for joining us, and we hope to see you in sunny Laguna a year from now instead of virtually.

We look forward to it Matt. We appreciate it. Thanks, everybody.

Thanks, Matt.

Thank you.