Primoris Services Corporation (PRIM) Earnings Call Transcript & Summary

Great. Thank you. Good morning and thank you all for attending the J.P. Morgan Energy, Power, Renewables & Mining Conference today. My name is Drew Chamberlain, clean energy analyst here at the firm and very excited to be joined by Primoris' CEO and Chairman -- or I should say, Interim CEO and Chair -- permanent Chairman, David King; and CFO, Ken Dodgen. Thank you, guys, well -- very much for being here.

Thanks, Drew.

Thank you.

I guess we should kick it off with, I think, the way all these meetings are kicking off. I mean, what's your view on what's in the Senate right now? What's the crystal ball that you guys are rubbing right now?

Well, relative to the Senate, we do think the Senate relative to the IRA is going to tone down a few things. I think we've said on our earnings calls, and we continue to say to investors that we really haven't seen much of an effect relative to the tariffs. We wanted to wait and kind of see -- have the air clear a little bit more on that. But really, right now, we're not seeing any effect that's substantial to us in any way whatsoever.

Okay. And then, I mean, can we talk a little bit about what your expectations would be? Should there be a pull-forward in demand? Are you having those conversations today? What do they look like? Are there actual safe harbors happening? And at the end of the day, what's your ability to meet that?

Sure. And I'll let Ken add to some of my comments. But most of our contracts that we do with our customers, we're very relationship-oriented. So we get in very early in the projects, understand the dynamics around those projects and things. And I'll kind of separate your question into 2 parts, so I'll talk about the backlog part and then I'll talk about the future work. On the backlog part, again, I'm seeing no effect on any of those kind of things. On the tracking forward, and I'll say relative to the battery energy storage in a moment, but on the projects relative that we're tracking and going forward, and I think we've got somewhere in the range of $20 billion to $30 billion between now and 2028 that we're tracking with some of our main customers as well as a few others, we do think and we're seeing, but we're not hearing anything definitive, that there may be some I'm going to -- I don't know if I'm going to call it pull-forward as much as resequencing of some of that work. Now relative to the battery energy storage, we've had some customers that's come to us, certainly not canceling any projects, certainly not worried about the projects going forward but have said until they got a clear definition on some of the pricing around some of that battery energy storage, they've asked us to continue the project and allow us to come in, in the future and drop that battery energy storage in those projects in the future. But to date, all the -- as I say, the relationships we've got with the clients that we have, it seems to be status quo, keep moving.

Yes. The only thing I would add is on the safe harboring piece that you asked about. They're monitoring that and trying to see what that might look like when the sunset period might occur and what the rules might be that would enable them to safe harbor. And then I -- and so they're running all their scenario analysis right now and basically trying to -- they're in a wait-and-see mode. And once they get clarity on that, then they'll come back and sit down with us. And David touched on resequencing. Then we may think about pulling the project forward that is more sensitive to the tax credits to make sure it's safe harbored and then pushing one of the other projects back so that we still have full workload.

Okay, okay. That's very helpful and I think a good segue to take a step back and get rid of the right-now questions and look at how good this business is. And what you've been able to do -- I think the reason I want to ask about it is what you just talked about, your ability to adapt to resequencing of projects. And I think it would be great for the audience to hear about your track record of doing that and how you've successfully done that in the past. Because I think we joke that there's a lot of people that talk about an ability in this industry to grab the next project when one gets delayed, and there's a relatively less amount of people that have done so successfully. And I think Primoris is a very good example of that. I think it's worth you guys talking a bit more about that.

Okay. And we're specifically right now talking just the renewables because obviously, that's only one piece of our entire project -- entire portfolio of what we do as a company. We got in the renewables business, and we pretty much organically grew it. Now we did make a small acquisition, but I'm telling you, it was very small and we organically grew that early in the process of seeing the renewables business take off. We also want to develop policies and procedures and business techniques that allowed us to what we considered put the right team in there, but more importantly, develop those projects with the lowest cost structure we could find. And I always tell people on a renewables project, "You're doing the same thing, but you're doing at 10,000, 15,000, 20,000 times if you're doing piles or whatever." And so we put in methods and procedures that allowed us to execute that work, even if it meant saving 0.5 hour on a particular item. If you save that 0.5 hour 10,000 times, that equates to a lot of money. And so our customers begin to see that. And so the relationships begin to form through our customers that they saw that we were adding a dynamic to those projects. It could allow them to get lower cost in the project. But because we self-perform everything, they could get the assurity of that project. And so that has allowed us to continue to expand. And we've continued to add crews. We continue to develop teams that continue to bring on new customers each day. But we've got customers that's been with us since day 1 that just continually do repetitive projects with us. And all of those projects are usually done in what we call a staged format, where we work with them to tell them what we think the project is going to cost at the start so they can start their PPA agreements and all of the above and then slowly begin to develop that project until we turn it into a firm project with them.

Yes. I mean just -- the only thing I would add to what David said is our business model, he talked about being a stage business model. That's because we're not just building the project for them. We're helping our customers design, engineer. We do labor studies, a whole host of other things for them, all of which we get paid for. So that, in combination with the relationship part that David was talking about, is what enables us to work closely with them and say, "Here's when we've got crews available. Here's when you want to build your projects. So let's work together to make sure that our schedule matches up with yours." And that's where the opportunity for that resequencing comes in because it's better for the customer and it's better for us because it enables us to keep crews busy and not have downtime in 2 projects.

And I'll add one more thing. We've got customers that have particular teams they put on the job alongside of our teams. And so those customers sometimes will have a new project that's coming on, but we're staging it in such a way that they can put their A team with it as well as us put an A team on it. And so we collaborate very closely with our customers.

You booked a lot of work in the second half of '24. I think some of that was a bit of a pull-forward from the first half of '25. You signaled that very clearly. You've laid out an expectation that you think the first half of '25 will be a little lighter in bookings. It sounds like it's going a little better than you expected, and you expect it to be back halfway. But can you talk a little bit more about -- looking pretty similar to last year. Can you talk a bit more about what your expectations are, bookings-wise, cadence, volume?

Yes. It is going to be almost exactly the same as last year. And that's not because there's any seasonality to it as much as it is just the cadence of our customers across our various end markets and how it happens to be working out this year. Part of it is what you talked about. It was the pull-forward of projects where customers got engineering, got FID, got permits and approvals or whatever the case may be earlier than they'd anticipated. And so as opposed to signing it sometime in the first half of 2025, we were able to sign it in the back half of 2024. Our expectation for Q1, for example, we beat our -- even though the first half of the year is supposed to be lighter, we beat Q1 by $300 million. Second quarter, probably going to be about in line with our expectations. We may beat it by just a little bit. And then what's happening is customers are lining up projects across all end markets. Again, we're not talking about just renewables right now, across all end markets for a lot of bookings in the back half. And it's nothing more than just the way the projects are evolving and just the natural timing of those projects. It doesn't have to do with what quarter it is within 2025 or any sort of seasonality.

And nor does it have to do with safe harboring or other pull-forward...

Correct, as of right now. So it's not to say that we couldn't see a little bit of that, depending on what happens with the final bill, but we don't see any of that right now.

And I will say, we have these kind of conversations very openly with our customers. We ask them the same questions you're asking us about those projects. Are you looking at pulling any forward? Are you looking at safe harboring? What are you doing? And so we stay very much in tune with them. And that's why Ken and I can say up here right now, we're not seeing any of that at this time.

Okay. Last one renewables-focused, I guess, is on tariffs, right? What was the impact to maybe bookings? Any impact of projects that were in construction? And particularly, what did it do with storage? And how do you think that plays out?

You want to start with it and then I can add on?

Yes, that's fine. The short answer is there was no immediate impact to bookings or anything like that. The tariffs -- because the tariffs are -- would have been affecting projects that wouldn't be starting until sometime in 2026. Everything we have in backlog, all of those already had panels, batteries, everything already prepurchased weren't subject to tariffs that were already onshore. So no issue there. The customers didn't pause or anything like that, but they did realize that, that was -- I think they saw what a lot of people did, which was a lot of the tariffs were meant to be negotiating tactics more than anything else. And so as a result, they did react. They simply said, "Let's see how this plays out over the course of the next few months," much the way it is right now. I think everybody is waiting for a little bit of finality to it to see if it actually causes them to make any changes. The one exception, of course, is battery storage. Do you want to talk about battery storage?

Yes. In the battery storage because -- not all of our solar projects that we do renewables projects has battery storage in. And the way I always like to look with them, the customer, it's more of a value add in that project as opposed to sometimes a necessity in that project. And so on those they had not already purchased the batteries and things, they did come to us and say, "We need to slow down on that part of the project, but we want to continue it. We want to put it in, but we need to get more clarity around what that price is going to be." And so they had us continue the project and as basically just laying a pad out there and getting ready for that battery energy storage system be put in at a later time. Once they've gotten their clarity, and some of those have already gotten their clarity on it, then they move forward to purchase those. And now they're saying, "Put them in your system and put them in." But didn't have any of them that said no, total stop.

And I think just to give a little perspective on that, $2 billion-plus business for us, battery storage is less than 5% of that. So even if there was any sort of disruption to that, overall, it would have very little impact on the business.

I'm assuming you're not changing any plans about how you view the battery storage business, right?

No.

No, no.

Okay, okay. Well, I think we can move on from renewables then. I mean let's turn to a topic that came up a fair amount in your meeting I was in this morning, power delivery. You guys operate in a very active market right now. Maybe leave this more a little open. I didn't let you guys talk about where your business has been, what you kind of announced at that Analyst Day a year ago and where the power delivery business is headed.

Okay. Well, let me start out by saying the power delivery -- and I put the power delivery in a pretty broad perspective here. Obviously, the transmission and distribution side of the power delivery but also the actual power generation side of it, okay? Besides being on the renewables side, we have built natural gas power generation plants for numbers of years and certainly have that capability. I think currently, we have 5 underway in some form or fashion. I think Texas, Oklahoma, Arizona, California...

Nevada.

Nevada, thank you. And all those projects are projects that we approach very similar to what we do on the renewables project. We go in on a very staged approach with them. So we're working with them upfront to determine the pricing so that they've got some clarity on the projects also. And that is -- we're really bullish on that because as we see the transmission build out, you're going to have to power that transmission systems. And that transmission system is going to have to be powered from a combination of just about every one of the technologies that you're seeing, not only the renewables but the gas-powered. And I do think at some time the nuclear side will come on also because I think we're going to have to have all those to meet the demand that we need in that transmission side. Now it's no secret also that on the transmission side, just about all of our customers that we've worked with have -- through PUC approvals and things have expanded their capital spending over this next 5 year pretty substantial. And when we talk with them, it's not only in the transmission. Everybody tends to jump on the transmission line and say, "Wow, that's big money," and it is big money. But when you look at what goes with the transmission, you've got the distribution that goes with that, you've got the substations that go with that, and you've got the lower voltage transmission. And that's all systems that we do and have done for a number of years and do through MSA agreements with these customers through a relationship base. So we are seeing a substantial potential for growth in those areas on the power distribution side. Then also when you start looking at the -- all the data centers, they all need power. Some are tied in the grid, some are not tied into the grid, some have under -- UPS-type power systems to it. And that's an area that we've seen because of our capabilities in there that kind of grew up from nothing. I mean we just all of a sudden had demands on us that continue to have demand. So what we're doing there, as with the power generation side, is we've got a tremendous amount of demand with us. And so we're having to grow teams to fill that demand. Now we can talk about potential M&A in a later question or something, but that's an area that we'll be focusing on because we're still very bullish on the T&D space as well as the data center and telecommunications. So you want to add anything in there, Ken, that I missed?

No.

Talk a little bit about maybe the move to larger projects there. I mean -- maybe in particular, what a larger project means versus a little bit of a -- the idea between a distribution type, small wire to what we read about going across the country and maybe where you fit in the middle of that, right?

Yes. Absolutely. So distribution work is mostly work orders given to us by our utility customer where we're going out and we may do 5, 10 work orders a day or something like that, small, discrete projects. On the project side, what we're doing is mostly transmission and substation work. Sometimes it's done in the MSA, sometimes it's done under separate contracts. And for us, substations range inside -- in size from $5 million on the small side to $100 million on the large side. On the transmission part of the business, transmission lines range on the small side from $10 million to $15 million projects all -- today all the way up to about $75 million to $80 million. And what we're talking about doing is not only doing more transmission substation work but also continuing to expand our capabilities from a high end of $75 million to $80 million up to a high end of $200 million to maybe $250 million. We are not looking to take a leap up to $1 billion transmission projects, which are going to expose us to a lot of risk. Instead, we're going to continue to be disciplined and expand appropriately and organically or maybe through acquisitions if an opportunity arises, that will give us expanded capability and give us a better balance between project work and distribution work. Distribution work right now is about 80% to 90% of our revenue in our power delivery business. And the balances of the project work, we want that to get to more of a 60-40 split partially because we think there's going to be more opportunities on the project side going forward, but secondly, because that generates -- that generally produces higher margins and that will be accretive to margins for the entire business.

Two-part follow-up on that. Talk about the risk profile in some of those larger projects, how you think about it. And then also, your crews, your team, do you have the manpower to do that? How do you build the manpower to do that?

Okay. Let me start out on that and talk to the manpower and then I'll talk with the risk. We have, for a number of years, built training centers and continue to train our own resources and things like that. That's a given. I can say that -- there's been a dynamic changing in the U.S., specifically in the U.S., over the last 2 or 3 years that I'm kind of liking. I used to tell you that I worried a lot about the labor resources. Now what I say is I worry more about the training of the labor resources because we are seeing the younger generation begin to realize that instead of coming out of college and getting a service industry job, which is nothing wrong with that, don't want to imply that there is, but that they can go into these kind of industries and be trained and maybe have $150,000-a-year-type job and things. And so we're seeing the supply of the labor come. But again, you've got to train it. And on the T&D space, especially in power generation side, you can't just train somebody in 5 months and put them out there on the job. You've got to stage it. So we are training more people. Is that a -- we've probably got more demand than we've got supply, and that's a good thing to have, but it's also a problem when you're trying to meet all the supply that you need for the demand. But really, beginning to handle that very well, I think, on the supply side, building the teams and building them in a way that we grow at a pace that we can control and that we know we won't get too far. The old statement people used to make about get too far over your skis and fall. So we're making sure we don't do that, that we take on work that we know we can perform well. On the risk side, most of those projects that we handle are all on MSA basis. We don't really do until -- the only lump sum work we will do, we do it in a staged approach, as I told you. But most of the T&D work, distribution work, substation work, that's all MSA-based. So we've already got fixed rates. We already know what our margin profiles are going to be. So the risk is really not there as far as the pricing side of the project. So...

Yes. Okay. 14 months ago, you had an Analyst Day and you gave a very helpful chart that broke down where you thought growth was in your business. And it included power delivery, renewables and comms. And I think the one that's probably left out of there that probably might look a little more growthy today is your gas power plant business. Can you talk about what's changed there, what you've seen happen over the last 14 months? And what's the state of that business right now, your outlook and where that business can go?

Yes. I think the main thing that changed was the demand outlook for power consumption. About that time and shortly after, it's when most of the U.S. started waking up and realizing that onshore was a trend that was going to continue, the electrification of the grid was going to continue and that data centers were really becoming another major driver of load growth. And so as a result, it was a harsh reality for a lot of people that renewables alone was not going to be able to fill that void. And so we're -- up to that point, the industry kind of gone away from gas generation. The industry all of a sudden pivoted very quickly and said, "No, we can't do that. We need to go back to natural gas generation." And so as a result, over the course of a very short period of time, we saw the opportunity to bid and execute on gas generation projects quadruple literally in a matter of a few months. It was that dramatic of a difference. For us, it was great. It was all about right expertise at the right time. We've been building natural gas generation projects for 4 decades, combined cycle and simple cycle. And so all we did was continue doing what we were doing and bid into more opportunities, but again, always with the idea of disciplined growth and being able to execute well. The 5 projects that David referred to earlier all have very strong margins and our backlog funnel -- our backlog and opportunity funnel for natural gas power generation is the highest it's probably been in 10 or 15 years.

And I'll also add something to what Ken was saying. The market that we chase in that is not retrofit market, okay? Now these projects we are building may be being built on a brownfield site, but it's adjacent to an existing power facility. So we don't really chase after the -- go into an existing power plant and try to convert it or retrofit it and things like that. Those can become pretty messy, risky projects. And so we kind of steer our business model away from those types of projects.

Okay. When you look at that industry right now, I mean, I think for you guys, it's about a $400 million business, in that range. Obviously, we read and hear about the equipment backlogs and how long it takes to get a turbine. I mean, how do you think about how long this can remain such a positive environment for you guys? And then how much can this business grow? Is this something where you want to grow a lot, be off this $400 million base and look to take on more CCGT work? I mean, what do you think of that?

Well, let me start out and then I want Ken to add to this also. The reason you're seeing us do so many of the simple cycles right now, even though we did the combined cycles before, is just on the supply of the turbines, okay? I mean you just can't get the materials right now for the combined cycle, okay? Are they coming? Yes, they will be coming. But right now, our -- most of our focus has been on the simple cycle systems simply because the turbines and things were available and things of that nature. I'm very bullish on that market. For us, it's not a situation where I need to go buy another entity or anything. It's -- we've already got the expertise. We've already got the field crews. It's a matter of me getting the project teams. Much like you saw us do on the renewable side, just continue to build as we ratchet that business up.

Yes. And what I think that equates to from a revenue perspective is I think we could probably comfortably grow it from $400 million each year -- again, depending on the opportunities that present themselves and the timing of bringing those people on, probably $50 million to maybe as much as $100 million of revenue growth on an annual basis for the next few years. The one great thing, even though the turbines and the availability of turbines is a constraint, and when we talk about that constraint, as we've talked in the past -- the lead time for turbines a year, 1.5 years ago was 2 years, now it's 4 to 5 years. And so what that's actually going to do is it's actually going to control that growth. So as opposed to the growth just skyrocketing, it's going to control that growth and take what should have been a 4-, 5-year growth cycle and spread it out over about 10 years because that's how long it's going to take them -- for them to build and get all those turbines in place, which is great for us. That goes back to our conversation about disciplined growth as opposed to having to whipsaw up and try to ramp up quickly, it will be more -- it would be a more natural growth trajectory and it will mean a much longer opportunity set for us.

And your teams for a combined cycle are going to be bigger than your teams for a simple cycle, okay? And so as we grow those teams, when those combined cycle opportunities come up, we're going to have those teams already in place to seize on that opportunity.

Questions from the audience? Great. As we said in the introductions, your title is Interim CEO.

Correct.

Any update you can provide there on the process, final candidates, timing?

Sure, sure. I came to the company about 11 years ago and was the previous CEO. And in this search, we're being very -- we're not rushing the search, let me put it that way. The Board had decided along with the management team that we were going to find the right person to fill this role. I think you'll appreciate that the candidates we've been looking at coming from a lot of different industries but industries around what we do. I was very impressed with the quality of the candidates that we're seeing. I can tell you just rough numbers. I mean we had a lot, but there was about 12 candidates that we needed to kind of screen down, screened them down. And we've screened down now to possibly 5 candidates right now, and we are going through Board interviews with those individuals. Timing, again, we're not trying to rush it. But if I was to put a time right now on it, I would probably say we will have that individual on board probably first quarter of next year. As you can probably appreciate, the individual that we're going to have that's going to run the company from that perspective is not just sitting on the bench somewhere. They're already out there actively involved and working. And so they'll have to close out where they're at when they come over to us. But the process is going very good and going through a lot of interviews and making sure we're screening for the right person that has the right kind of -- a lot of our questions we're asking candidates are strategy questions. If you came to this company, what would you look at? How would you grow this company? What's your thoughts on M&A? What's your thoughts on leadership? What's your thoughts on training? What's your thoughts on labor? I could sit and bore you with a lot of questions, I'm not. I'm telling you that to let you know the degree that we're looking at to find the right person.

Okay. Great. On that, M&A, balance sheet, I mean, stacking cash, well below the target leverage ratio. I mean, how do you view that from, I guess, just a flexibility perspective and how you can deploy capital? And then what's appealing and what are the priorities right now?

Yes. Look, for us, the 2 main priorities have -- over the course of the past couple of years have been continuing to support the organic growth of the business and delevering. The good news is we've been able to make some changes in order to improve free cash flow, which enable us to accelerate debt paydown even beyond our expectations and our plan when we did our last acquisition a little over 2.5 years ago. So we've grown organically. We paid down debt. Now we're ideally positioned for the next acquisition. We've continued -- for the past 3 years, we've been continuing to look at acquisitions since our last one. The challenge has not been quantity, it's been quality. We just have not seen good quality acquisition candidates. Good news is we kind of turned the corner in 2025 and the candidates we've started seeing now seem to be much better quality, much better fit. And so we're hopeful that sometime this year or if not this year, into early next year, we'll find a good opportunity and we'll be able to close and announce on that. From a priority standpoint, it's really heavily, heavily focused on our power delivery business. So much of our -- so many of our businesses, the opportunity is really around organic growth. But the 1 or 2 areas where acquisitions can be very accretive and very complementary and get the return on invested cap, meet our return on invested capital threshold is in power delivery; and secondly, behind that, in communications. So those are the ones we're focusing en route. And like I said, better quality and better opportunities coming out right now.

Okay. Anything else? If none, I think we are right on time here. So I think it's a good place to wrap. And thank you, Ken, David, for joining us today.

Thanks, Drew.

Thank you all. Thank you all for listening. Appreciate it.

Thank you.