Greetings! Welcome to Primoris Services Corporation 2019 Second Quarter Financial Results Conference Call. All this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions]. Please note this conference is being recorded. I will now turn the conference over to your host, Kate Tholking, Director of Investor Relations. You may begin.

Thank you, David. Hello. Good morning, everyone. Thank you for joining us today. Our speakers for the day will be David King, Executive Chairman and Chief Executive Officer; Tom McCormick, President; and Ken Dodgen, Executive Vice President and Chief Financial Officer. In addition to this morning's press release, we have also posted slides on our Web site that highlight key points we plan to discuss on this call. You can access them by going to our corporate Web site, www.prim.com, then selecting Investors. Once on the Investors’ site, you'll find the slides in the Events & Presentations section, next to the webcast link for today's call. Before we begin, I'd like to remind everyone that statements made during today's call may contain certain forward-looking statements including with regard to the company's future performance. Words such as estimates, believes, expects, projects, may, and future or similar expressions are intended to identify forward-looking statements. Forward-looking statements inherently involve risks and uncertainties, including, without limitation, those discussed in this morning's press release and those detailed in the Risk Factors section and other portions in our annual report on Form 10-K for the period ending December 31, 2018, and other filings with the Securities and Exchange Commission. Primoris does not undertake any obligation to publicly update or revise any forward-looking statements whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws. I'd now like to turn the call over to our CEO, David King.

Thanks, Kate. Good morning, everyone. Thank you for joining us today to review our 2019 second quarter results. We’re extremely pleased that we delivered another quarter of positive earnings, $0.35 per share, and we ended the quarter with a backlog of over $3 billion, reaching another record in Primoris’ history. This quarter marks the 44th consecutive quarter Primoris has posted profitable results. Our record second quarter revenue of 790 million was 22% higher than last year’s second quarter revenue. I want to discuss the risk profile associated with our revenue growth, because I’m aware of others in the construction industry that have faced recent challenges and it’s important to recognize that Primoris’ risk profile is different from many of our peers. Our MSA revenue continues to grow, accounting for 44% of the second quarter revenue. This focus on growing our MSA revenue is one side of our risk management strategy as our utility-based revenues are stable, deliver good margins and provide several years of visibility. The remainder of our revenue is fairly evenly split between our other operating segment, and we are not reliant on any one cyclical end market or any one single project. While it is true we have a handful of larger projects, we place a strong emphasis on contract terms and most of our larger projects are either unit priced or cost reimbursable. Fixed-price jobs account for less than 25% of our revenue this year. We have historically been very successful on large projects like power projects and major pipelines, but they are not Primoris’ bread and butter. Our average contract value is less than $10 million. We strongly believe our focus on growing MSA revenue, diverse end markets and a conservative mix of project size and a disciplined approach to contract terms are critical elements…

Thanks, David, and good morning, everyone. I’m going to review our second quarter operating results, our balance sheet and cash flows, and our 2019 guidance before we move on to your questions. Our second quarter revenue was 790 million compared to 649 million in the second quarter of 2018, an increase of over 140 million or 22%. The Transmission segment accounted for almost 93 million of the increase as we had three full months of revenue in 2019 compared to only one month in 2018. Our Pipeline segment also contributed over 46 million to the revenue increase, primarily driven by strong growth in our field services business, along with increases of both Rockford and Primoris Pipeline. Our largest three customers in the second quarter and year-to-date were utility customers, where we work under long-term MSA agreements. In the second quarter, these top three customers accounted for a combined 21.6% of our revenue, and year-to-date, those same top three customers accounted for a combined 20.7% of our revenue. Under these MSA agreements, we invoice our customers for thousands of work orders each month with many averaging only a few thousand dollars. This is just further evidence that we don’t rely on large fixed-price jobs to achieve our results. Gross profit in the second quarter was just under 81 million compared to 71 million in the second quarter of 2018, an increase of 13%. The increase in gross profit was primarily driven by the revenue growth in the Transmission and Pipeline segments mentioned earlier. Gross profit as a percent of revenue was 10.2% in the second quarter compared to 11% in the second quarter of 2018. This decline was largely due to the impact of challenging weather conditions in the Utilities, Transmission and Pipeline segments. SG&A expenses in the second quarter were…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. Our first question is from Lee Jagoda with CJS Securities.

Hi. Good morning. It’s Pete Lucas for Lee. Just assuming normalized margins in the Transmission segment should be in the low-double digits, you mentioned a large impact from weather, but can you break out how much was weather versus mix and when you would expect the mix to normalize?

Yes, Pete, thanks for asking the question. When we bought the T&D group, we mentioned – I’ll come specific to your question in a moment, but we mentioned that it was going to take us a couple of years to get those margins up to the level that we were expecting them to be, mainly because they had some pretty onerous leases and having to work off those leases, both from a real estate as well as from an equipment perspective. And we’re still anticipating that those margins will come up over this next three to four quarters to close to what we were expecting to be, which is pretty close into those ranges you mentioned plus right around our U&D group. I will also mention that – you’ve seen the numbers from that group that we’ve reported over the last 12 months. They are very much in line with what our EBITDA – in fact, they’re actually above what our EBITDA expectations were in that particular unit when we did the acquisition, and the ability to somewhat flatten out or smooth out, I guess I would say, some of the dips that we’ve had in our earnings in the past and first quarter and second quarter, their MSA backlog has certainly helped do that. When you actually look at the weather versus the cost that we did moving into some of the areas and some of the leases, I would probably tell you that most of that margin shortfall was due to us getting out of leases and moving into the equipment side of that, not the weather side, although weather had some effect, it was more from the equipment lease side.

Helpful, thanks. And just one follow up from me turning to Civil. Can you quantify the major refining project that started this year in Civil? And also, are the lower volumes from Texas DOT expected to continue or was that mainly a weather impact?

Yes. I don’t want to identify because we typically don’t identify our major customers list. It was a refining customer down in the Louisiana area that actually our PDC group that we started a few years ago was able to secure that contract and allow our I&M group to get in there and start doing some site work on it. Your second question, I’m sorry I missed.

Sorry. It was just regarding the lower volumes from Texas DOT. Do you expect the lower volumes to continue or is that mainly a one-time weather impact?

That’s probably a one-time weather impact. Now we have, as you noted in previous calls, we intentionally – until we got that group turned around, as we used to say turned the battleship back in the right direction, and Mark Buchanan has certainly got that headed that way, we intentionally kept the revenues fairly flat relative to the amount of work we would take with TxDOT. I believe you will start seeing that now begin to open back up since we’re beginning to see some very positive results out of that group.

Very helpful. Thanks, guys.

Thank you. We appreciate the questions.

Our next question is from Tahira Afzal with KeyBanc Capital Markets.

This is Sean on for Tahira. First question for me is, this is alluded to in the prepared remarks, but I’m hoping to get some updates and some added color on the LNG and petrochemical prospects. And how you’d characterize the likelihood we might see some larger bookings there for the PI&E segment? And maybe just broadly, how backlog is expected to trend in the next few quarters for that particular segment?

So this is Tom McCormick and I’ll answer that question and David can add to it if he wants. With respect to petrochemical and LNG prospects, we have another one that we’re still tracking. We’re working with some larger major EPCs on those projects. They’ve just pushed a little bit out. We still expect those to come to fruition, so to speak, but it’s going to be later in the year, which means we probably won’t burn a whole lot of revenue on those jobs. They’re awarded later this year that will go into 2020.

Yes. About the only thing I’d add, Tom, is as you know, we’re – on the larger LNG projects, we are subcontractor to most of those major EPCs that secure those and you’ve certainly heard a few of them began to make announcements here recently of those awards. And so some of those we’ll be able to pick up some work, as Tom mentioned, in the later – this third to fourth quarter, which will really begin to start first to second quarter of next year.

So one thing to think about is those jobs awarded that they got to go through a certain design phase. A lot of them have done some frontend work, but they got to go through a design phase and start issuing drawings for construction before you’ll see contractors mobilizing the site.

And on the petchem side – that was LNG side. On the petchem side, you’ve also seen, again, we are a sub to some of the majors on some of their petchem work and you’ve at least heard of a couple of them mention some methanol-related awards, and we’re in line to get some of that work as a dedicated sub on some of those projects. So it’s a little bit of mix of the LNG work, a little bit of mix of anything to do with methanol, whether it’s a methanol facility and then some of the ethane type of work – ethane cracking work that we mentioned in our prepared remarks.

And I think with respect to the petchem, it’s going to be tied to the clients getting their necessary permits they need to mobilize the sites.

Great, very helpful. And next question for me is I was just hoping to get an idea of how you guys are positioned around ACP at this point. It sounds like the prospect pipeline is really strong. As we await a potential restart, how you guys might be able to offset potential further delays on that particular project?

Well, as you know, they’re a good customer for us. And we certainly don’t want to abandon any customer. In fact, we have a contract with them. And so we’re hoping they get that approved the latter part of this year. But there is a very robust demand for large-diameter pipelines. In fact, what we had to do when we were asked to be kind of put on hold on ACP, as I mentioned, we immediately released those resources and secured two awards very quickly. Those were the ones that I mentioned in Pennsylvania and in West Texas and burning revenue quite well through our Rockford group. What we’re also seeing with our Rockford group is, we can’t announce on it obviously, but some verbal pre-awards on some fairly large projects that will be starting up in that 2020-'21 and onward timeframe. So we are very encouraged that – I hope ACP goes through, gets approved. I think it’s a great project. But in the event it doesn’t, we’ll be able to quickly marshal those resources to – on these other projects that we’re verbally talking with now.

That’s great. And last one for me is, in the T&D segment, I believe you guys were expecting to secure a pretty major MSA renewal on a legacy WG contract in the very near term. So I’m hoping for an update there to the extent you can comment. And maybe just tie in how those discussions with those T&D customers are going around renewals and pricing discussion.

This is Tom McCormick, again. I’ll answer that question. The discussions are going extremely well. We’re very close. I would expect it’s sometime in the third quarter, early fourth quarter, we would have an agreement in place and be able to execute that contract. So it’s actually going extremely well.

Yes. I’ll add one more bit of flavor. The revenue levels that we’ve typically seen from that when we acquired that group, it will be at that level or maybe even slightly above when this renewal gets done, so looks like it’s headed in a very positive direction.

Really helpful responses. Thanks so much for the time.

Thanks for the questions.

Our next question is from Adam Thalhimer with Thompson Davis.

Hi. Good morning, guys. Congrats on a good quarter.

Thanks, Adam.

Hi, Adam. Good morning.

Good morning, Adam.

Ken, can you give us some kind of sense for free cash flow for the full year?

Yes. So free cash flow for the full year, I don’t have the numbers in front of me right now, but they’re probably going to be slightly ahead of last year just on higher revenue levels, and so I would guess probably 10% to 15% above last year’s levels.

Perfect. Okay. And then you mentioned fire hardening work in Northern California. Would you say that work is steady or is it accelerating? And then how does ARB – I mean what are they doing for that?

Well, this is – Adam, this is Tom McCormick. So in California, a lot of what we’re doing is replacing a lot of power lines in certain areas of Northern California for our clients out there with coated lines that have protection on them or in some instances, we’re going underground. We also have clients in the Southeast and up the Atlantic Coast that are – it’s not fire hardening, but it’s certainly hardening their systems for storm whether it be hurricanes or ice storms, so we have a number of clients there that have programs in place or starting programs in the coming years. It is probably growing more. It’s probably – right now it’s flat, a little bit flat in California, but it is expected to pick up in the coming quarters. And in the East Coast and the Atlantic Coast, that’s going to grow for a number of years. It’s going to be multiyear programs to do that storm hardening.

In fact, Adam, I’ll add a little bit more. Unfortunately, when all those fires took place in California, obviously, we were one of the major contractors out there that was working to clean up all of the fire situation. We had taken a strategic look a couple of years ago at the request of one of our clients in Northern California because previously ARB Underground had been more of a gas distribution, not an electrical contractor out there. But about two years ago, we really went into the electrical side of the business out there under the ARB Underground umbrella, if I can call it that, at the request of the clients out there. So we’ve steadily seen that electrical work for us in our ARB Underground segment continue to go up. And with what’s going on out there with the hardening of all of that system, we do expect to see that ramp up for both the Northern California as well as the Southern California customers over these next few years, if not longer.

Okay. Perfect. And then Pipeline margins. How are you thinking about Pipeline margins for the back half of the year?

Well, the margins on the first half of the year was really hurt more because of the weather situation. So really I think as we go into the back half of the year, typically we don’t see the weather situation. So we should be running at one of our typical margins in our Primoris Pipeline group. In our Rockford group, again, right now, the demand is pretty heavy in the larger-diameter gas lines, and indeed our Primoris Pipeline group is getting larger-diameter gas lines also. So I’m anticipating – although I’m cautious when I say this, but I am anticipating that the margin improvement is going to come up in the last half relative to those larger-diameter pipelines.

And then lastly on the Civil segment, you said return to normal in '20, but I forget what normal is? It’s been a while.

Yes, we’ve always said that when that unit’s running properly, that’s in a 4% to 7%. 3% to 7% I think is actually what Kate puts on our slides and things like that. And with the mix and with the performance that we’re beginning to get from it, I think we’re going to see that come up into that mid-range of that 3% to 7% range, maybe even a little higher. But that’s kind of what we’re looking to get. Now again, part of the pull down in that group is we are literally finishing off the Temple project on the I-35 corridor, and so we still got a little bit of revenue burn at zero margin that continues to pull that group down some.

Okay. Perfect. Thank you.

Thank you.

[Operator Instructions]. Our next question is from Brent Thielmann with D.A. Davidson.

Hi. Thanks. Good morning.

Good morning, Brent.

Good morning, Brent.

Good morning, Brent.

David, maybe just on the Civil side, Any update in terms of some of the claims you guys have been after there?

Sure. There’s five projects in that I-35 corridor, two of them we have went ahead and submitted our paperwork to what’s called the Contractor Claims Committee, the CCC, and I’ve gotten notified at least by TxDOT management that those CCC claims will be held about six to nine months from now. At least what we’re seeing is I feel comfortable with that claim. I feel comfortable where we’ve got it represented at. So that one – those two are progressing on through. There are three of those remaining five projects that we’ve received indication that rather than go through the CCC process, that it might be best just to sit down and show them what we’re talking about and then not have to go through what’s called a Contractor Claims Committee, and we’re in the process of going through that. I really can’t handicap that for you because when you’re working with TxDOT, it just depends on the people you lineup across the table sometimes and whether or not they won’t admit their mistakes. Those that admit their mistakes, they settle pretty quick. Those that don’t admit the mistakes, they want the system to admit their mistakes for them so it takes the burden off of them. So I’m expecting that those resolutions not to be done for at least another; optimistically, we might be talking six months; pessimistically, it might take us at least another 9 to 12 months to get those resolved.

Okay, that’s helpful. And then I guess on the Power segment, you guys have obviously made a big kind of strategic shift and focus towards more the renewables area. I guess I’m curious, David, if you – are you guys optimistic about any potential nat gas sort of project awards in the next 12 to 18 months?

We are. We have – and Brent, I appreciate your question because it gives me an opportunity to really – we really didn’t do a shift. If you remember, the first battery storage facility in the state of California, we built. The solar projects out in the state of California, we built. But at the same time, we were building nat gas facilities also. But the headwinds to – and we’ve had verbal awards of an additional nat gas facility in California, but we haven’t announced it because the headwinds to get that project approved in the California is still – still gives us the feeling that it may or may not go. So what we began to look at was the rest of the nat gas facilities and where our best opportunities were. And we’ve still got some that we’re nurturing along in our opportunities that are nat gas-based facilities across the United States. As you remember, we did one in Virginia. I guess, it was – we finished it about a year and a half ago, very highly successful project for us. But at the same point in time, we began to look at really demand and the push on the renewable side. And I’m one of these people that kind of currently believe that wind farms, they may be getting close to their maturity level or begin to flatten, but solar is not. Solar is still on a very upward mobility. And what we found was a void in that marketplace for what we thought was some very really good contractors out there that could marshal the resources to do these 2,000 and 3,000-acre sites, like Primoris can. And so I wouldn’t say it’s really a market shift away from nat gas to renewables, we’re definitely still chasing the nat gases. It’s just that while the headwinds are against nat gas, these renewables are out there and it seems a perfect opportunity to slip our groups in, and we’ve been highly successful so far. And in fact, I think you’ll see us announce some others in the not too distant future, because we’re tracking several good opportunities for us for additional solar work in that Southwest region.

Okay, that’s really helpful color. I guess then on the Pipeline side, it sounds like you had some things a few years out that you’re talking about with customers. I guess I’d be curious, are you seeing the types of projects out there like ACP that – I think some of the concern on the Street is booking new work that may run into some of the issues that ACP has experienced? So can you just talk about the kind of the composition of projects out there that you’re bidding and quoting and talking with some customers? Any color there?

Yes. Any of the projects unfortunately that are the big projects and it doesn’t make any difference whether it’s Mountain Valley or ACP or all of these, they get such high visibility and things. And yes, we have an opportunity on those types of projects. But then you also see on these larger diameter ones that are in more regional friendly states in the Southwest and the Gulf Coast where these LNG facilities have got to have natural gas brought to them. So you got to appreciate that the people on the intake supply for these LNG facilities are out there talking to the pipeline operators about putting in major pipelines to supply the gas. And indeed, that’s what we’re beginning to see as some of those commitments that are already made on the LNG side, we’re beginning to see the award of those projects to bring natural gas out of that Permian region. So yes, we’re still seeing tremendous amounts of opportunity in what I would call more regional-friendly areas for the large-diameter pipeline.

And Brent, this is Tom McCormick. The other thing we’re seeing is, you’re seeing smaller projects that don’t have the visibility of these large multibillion-dollar projects, and so they kind of stay below the radar. So there’s a lot of those in these areas that we operate that clients are going forward with that you just don’t really hear about.

Brent, I want to add one more quick thing because I just thought of it. I said it in my comments, but I don’t want it to go unnoticed by a lot of people. One of our strategy a few years ago was to really get more in the field services side of business, and in fact we had a field services group, albeit small, in Texas that we acquired when we did our Sprint acquisition. But a few years ago, we bought a company called Coastal Field Services, brought on a gentleman by the name of Jeff Bridges. And in my comments, I think I’ve mentioned, we have quadrupled the size of the services and these are field services that go along with those pipelines that have to be performed live and on an annualized basis year-after-year-after-year, but then also pumping stations, compressor stations, things of that nature, and so that side of our business has really began to blossom. And I think that’s an area you’re going to see us moving more into in the future, not only in the Texas and Louisiana region, but across some of the other regions that have these large-diameter pipelines.

Got it. Okay. And I guess the last one for me. The balance sheet is in good shape, leverage pretty manageable. I guess I’m curious how much of your time you’re focused on kind of new business prospects via M&A?

Well, you kind of hit it on the head. The reason I promoted Tom up to President and things was – and then we brought John Moreno in as Chief Operating Officer was to let me begin to look more at some of the M&A activities. And we finished our strategic planning process earlier this year and came up with some very good opportunities, both organic, to grow organic, but then also through acquisitions. And indeed, I’ve already started looking at a couple of them for us. The timing needs to be just right on them and some of them are going to be entryways into what I call very markets that are just now beginning to take off, so things that will benefit the company longer term, three, four, five, seven years from now. So, yes, you’re going to see me spend a lot more time on the M&A side.

Okay. Thanks for all the color.

Thank you very much for your questions, Brent.

Thank you. We have reached the end of the question-and-answer session. And I will now turn the call back to David King for closing remarks.

Well, thanks everyone for joining us today. I want to make sure we gave a special thanks to our over 12,000 employees who work for Primoris safely each day providing quality projects to our customers. I also appreciate all your questions you asked us today and we look forward to seeing many of you at our planned investor conferences. I appreciate your questions. Have a good day.

Thank you. This concludes today’s conference. You may disconnect your lines at this time and thank you for your participation.