Greetings, and welcome to Primoris Services Corporation Reports 2020 Third Quarter Results. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kate Tholking, Vice President of Investor Relations. Thank you. You may begin.

Thank you, Doug. Good morning, everyone, and thank you for joining us today. Our speakers for today will be Tom McCormick, Primoris' President and Chief Executive Officer; and Ken Dodgen, Executive Vice President and Chief Financial Officer. In addition to yesterday afternoon's press release, we've also posted slides on our website that highlight key points we plan to discuss on this call. You can access them by going to our corporate website, www.prim.com, then selecting Investors. Once on the Investors site, you will find the slides in the Events and Presentations section next to the webcast link for today's call. I'd like to remind everyone that statements made during today's call may contain 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 yesterday'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, 2019, 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. Before I turn the call over to our CEO, Tom McCormick, I'd like to introduce Primoris' new Vice President of Investor Relations, Brook Wootton. Brook has a long history as an Investor Relations officer in the utility and energy markets. She'll be taking over the role for me as I transition into a new opportunity in Primoris' finance department. I've really enjoyed getting to know all our analysts and investors over the years, and I'll miss seeing you at our investor events, but I'm confident Brook will do a great job going forward, and it will be a smooth transition. So now I'd like to turn the call over to our CEO, Tom McCormick.

Thank you, Kate. Good morning, everyone, and thank you for joining us today to discuss our third quarter results. This was a record quarter for Primoris and is all the more impressive given the challenges that the country is facing from the pandemic, reduced energy prices and widespread economic uncertainty. The third quarter was a continuation of things we saw in the second quarter. Sustained strong performance in margins in our heavy civil and electric utility work demonstrating that we have definitely turned the corner in those businesses, continued strength in our gas utility markets, growth in our pipeline business, driven by nonunion field services work. And a renewables market that is driving strong performance through multiple solar and biofuel projects. We achieved these results while continuing our focus on safety. Working over 20 million work hours and keeping our total recordable incident rate below our company-wide target level. I am incredibly grateful to all our employees across the country for their commitment to maintaining a safe work environment and executing their work successfully despite all the distractions that they have had to deal with this year. Even with record revenue burn in the quarter, we were able to maintain a healthy backlog, ending the quarter at $3 billion in total backlog, which excludes the ACP project now that we've received the formal notice of termination from our client. Our backlog reinforces the strength of our business across our end markets as particularly in our gas and electric utilities markets as well as the renewables market. Thanks to strong project execution, project controls and continued SG&A discipline, our cash flow remains robust, and our balance sheet is stronger than ever. We're using some of that cash for internal upgrades to our IT and HR systems and tools, investments we expect…

Thanks, Tom, and good morning, everyone. I'll review our third quarter operating results and then move on to our cash flow, balance sheet and backlog. Our third quarter 2020 revenue was $942.7 million, an increase of $77.6 million or 9% compared to the third quarter of 2019. This growth was primarily driven by an $80.8 million increase in our pipeline segment revenue related to projects in Texas that began earlier this year. Our Utility segment revenue improved by $17.4 million as work increased in California, and renewables continued to drive our power segment as revenue increased $11.9 million related to solar and biofuels projects. These increases were partially offset by modest revenue decreases in the transmission and civil segments as we continue to rightsize contracts. Our largest 2 customers in the quarter were 2 gas utility customers that collectively accounted for 15% of revenue and a midstream pipeline company that accounted for 6.3% of revenue. Gross profit in the third quarter was $123.7 million compared to $108.4 million in the prior year, primarily due to the increased revenue. But in addition, gross margins increased to 13.1% in Q3 compared to 12.5% in the prior year. Our Transmission segment recorded significantly higher gross margins in the third quarter coming at 12% compared to 3.8% in the prior year. Our strategy to focus on higher margin work, cost management and strong safety performance drove the improved profit, and we also had the benefit of some storm work across the southeast during the quarter. Our Utility segment continued to perform well with 18.2% gross margins for the quarter, primarily due to higher margins on projects in the Southeast and good weather. Our Power segment experienced a slight decrease in gross margin during the quarter, mostly due to higher costs associated with an LNG…

[Operator Instructions] Our first question comes from the line of Sean Eastman with KeyBanc Capital Markets.

Team, many compliments. Great third quarter.

Thanks, Sean.

Thanks, Sean.

So I guess the one thing I'm kind of struggling with is the moving parts in the Power segment. So clearly, some strong underlying drivers for the renewable piece, but it sounds like Western Canada and chemicals, refining, a little trickier to put your finger on. So I'm just curious if you could just talk through the moving parts there as we try to think about the revenue trajectory for that segment going into 2021?

All right. So Sean, this is Tom. Let me -- I'll try to answer your question, but I might not sure if I'm not -- if I don't answer, you can clarify a little bit. But I think that from the standpoint of our industrial groups, what you're seeing and what we're seeing is a lot of movement away from refining and petchem more to biofuels and renewables. We have refining clients that are modifying their facilities more for -- whether it be green diesel or biofuels, make that as part of their offerings to the market, and we've gotten ahead of that. We've been able to get ahead of that. We're doing a lot of front-end design work that -- for those -- a number of those projects. We've actually won a biomass project in California last year, which you know when we spoke of in this call, and there's other opportunities that we're seeing that's kind of -- we were able to -- fortunate enough to get in front of that and have good relationships with these clients that we're not so reliant, although it's still refining, it's renewable. And we've got some projects, both out in the West and in the Gulf Coast that we need to finish up that have been a little bit problematic. The ones in the West are still very profitable projects. We've just had to work through some issues and then the one in the Northeast. And that one, we think we've got it contained. We think we know what the costs are on it. We've had those in our forecast and that project should complete by the -- in the second quarter...

Of next year.

Of next year. So the -- we have made some changes in the management team. I think we spoke to that last quarter and -- in our nonunion group. And we are seeing a lot of positive results from the performance of them and their respective management teams and leadership groups, getting positive feedback from clients, which is actually leading to more work. And we're trying to build on what their strengths are and it's working. We have clients now, although -- albeit smaller projects, which we always said and always believe. Going into 2021, the larger projects are going to go away, and we have to be able to do the smaller projects, which is what we've done in our history anyway. Yes. And then you have solar, which is a huge growth market for us. And we actually have to tamper that a little bit because there's so many opportunities out there. You can get out over your skis if you're not careful. But that group has performed well on every project they've done. They actually exceeded expectations on every project they've done. They got a great partner and relationship with their clients. And there's a lot of -- and there's also pull-through with our other businesses from their projects. We do site work, we do clearing, we do grading, we do the transmission lines. We can do the substations. We haven't done those -- on any of those on projects that we've executed yet. But that is work that we can provide. We can actually be a one-stop shop for clients when it comes to solar facilities, which I don't think there are any other contractors that can do that. So how it looks like for 2021? I couldn't answer you that right now, but there is work out there. We're in the process of doing our -- developing our 2021 business plans right now and that will be later on in the year or early next.

Got you. All right. That's all really helpful color. I guess, maybe just to maybe put -- maybe I'm pushing my luck here, but as you sit today, does that segment look like it's going to grow revenue and be back in that targeted gross margin range in 2021 on a preliminary thought?

Yes. I think we're going to be in our target margin range. I think we're going to see -- I think you'll see growth in that segment, but it's not going to be in the areas that it's traditionally been. We -- typically, it's been out west and in the industrial markets, we've seen growth. They may be flat this year. But there is opportunities with renewables. If we win some of the projects that we're after, they'll see some growth. I think it's primarily within PRE, the Renewables group. We're going to see -- you'll see significant growth in that.

Got you. Okay. Great. And on the pipeline and underground segment, when you pull ACP out, it shows a really high underlying burn this year in that backlog. I think that segment has clearly done a lot better than anybody would have thought this year. But just curious how much visibility you guys have there, what you're seeing around sort of this spring selling season going into next year in that segment? Just kind of curious what scenario you're planning around at this point.

Well, again, we're in the middle of that planning process. But I'll tell you what we are seeing in that. I spoke about this last quarter also. I think we're going to be able to replace quite a bit of the ACP revenue -- the lost revenue from ACP on smaller projects and different service offerings, which we're actually talking to some clients about the service offerings now, and it's more field services type work in union markets. And then -- we're not going to be able to replace all of it because I think ACP was a significant burn, you're right. But enough to -- probably that group may be a little bit flat, don't know yet until I see their final numbers, maybe a little bit smaller, but certainly will be profitable. It's just going to be the back of smaller projects.

Our next question comes from the line of Lee Jagoda with CJS Securities.

So congrats on the quarter. Congrats on having revenue as good as you did and while maintaining backlog at flat. So that's awesome. Looking at the bidding environment and sort of the consequences of the election, did you see any either halt in bidding or halt in lettings temporarily as we kind of wait for whatever the outcome here is? And would you expect to see some additional lettings coming pretty quickly between now and year-end once the election is decided?

In what market specifically, Lee?

I would love to hear about all of them.

I don't know that we probably have seen -- we've seen some certainly in pipeline and field services. Any business tied to the price of oil or oil demand or energy demand, clients are waiting for. But we saw those in the second quarter also. So they're not new to the third quarter. Our expectation is that we'll see some change. I think most of our clients' expectations are regardless of who wins the election, you're not going to really see any immediate impacts from that, but they are waiting because it does affect some longer-term plans, maybe on some larger projects that may have in the works. We've been -- we've known this and expected this for a while. So we've kind of worked around it. In industrial, it's just -- it's a function of the -- some of these larger projects being able to reach the point of financing. And we've actually changed our direction a little bit, not much because we've always chased smaller projects, but we concentrate on -- our core projects are $5 million to $25 million, maybe $30 million of those projects. You've seen in California with Tim Healy's group, the Union Industrial Group where a lot of -- there's no big power plants going on in Tim's group. He used to build probably a new power plant about every 3 years, 2.5 years. Well, now he's building and getting revenue on smaller projects, smaller capital projects, maintenance projects, maintenance services. And he's been able to replace biofuels now in this large $200 million project that we're executing for one of our clients out there. So we've been able to replace a lot of it. But what -- I guess, our expectation is the bid slate is going to be tight. You're going to see more -- we'll see more bidders, which means our estimates have to be better, and they have to be tighter, may put some pressure on margins. Renewables, I'll tell you right now. There's so many opportunities out there. That's the opposite of everything else we see. And then really, in some of the utilities, there's -- our clients are still spending money. So our gas utilities and electric utilities, we're moving out of some areas because some of the work and replacement work that was being done in some of these gas utility markets is finished. And we're chasing other work in other regions, but that's just helping us expand our reach. And then in T&D, our clients, they're -- actually, their budgets have grown. And we're actually trying to get more clients and develop relationships and MSA contracts with more clients. So we haven't seen a lot of drop off. As a matter of fact, we haven't seen any drop-off in those markets.

That's great. One more for me, and I'll hop back into the queue here. Just on the transmission side. I know when you do emergency work, it doesn't really impact revenue as favorably as it might impact margin. Is there any way for you to quantify the positive weather impact to margin in Q3? And I know you had mentioned you've sort of gotten things cleaned up, got the integration done. So going forward, we should expect sort of a more normal margin range. But if we could break out sort of the emergency onetime-ish type stuff in the quarter that would just help modeling going forward.

Yes. Lee, I think for the quarter, it probably gave us about a 2% bump on margins.

2 percentage points?

Yes.

Our next question comes from the line of Adam Thalhimer with Thompson, Davis.

I want to take another shot at the pipe. I have no idea what to model for pipeline revenue next year. Because you had $500 million or $600 million and then this year, it was over $800 million.

Yes. We had a couple of projects that did really well, had a lot -- quite a bit of growth on them that really helped drive those numbers this year. And again, we were very fortunate because certainly in the nonunion side, the smaller diameter, shorter runs, not cross-country, but more interstate, the performance was exceptional and the weather was exceptional. The -- with all the hurricanes that came up through the Gulf Coast, it never affected these projects, whereas the industrial -- the union side got impacted a little bit. It impacted a couple of their projects, but those projects were primarily in the South of Houston. So they're right there on the coast and they got bombed. Next year, I would expect -- if I look at this in 3 different ways because it's 3 different business units in that segment, primarily, the field services will probably be up a little bit. I would expect the nonunion pipeline, which is a smaller diameter, shorter runs, will be either flat or a little lower, but not significantly lower than they were this year, just because of how well it went and how much -- how fortunate they were to win some of the work they got this year. And then the union side, I would expect to be flat or probably a little bit below and maybe as much as $30 million or $40 million below. And again, we're just in the planning stages of our 2021 plan, so I'm just speculating.

But you're closer to that $800 million range than the $500 million range. Clearly.

Yes.

Okay. So -- and then the second question would be the same question for Utilities & Distribution. What are you seeing from customers in their CapEx budgets? I think you had some projects in the southeast that were maybe kind of onetime-ish for 2020. So do you grow revenue there next year or just kind of flattish?

No, I think it will grow. I think the -- those -- our expectation is our utilities will grow. It's not going to be double digits, but it will be in the mid-single digits, maybe a little bit higher. Again, our clients, the mix of work may change, the type of work may change, but most of their budgets have actually either remained the same or going up.

Okay. And then lastly, power. I think you said a little bit of margin pressure first half and then that kind of releases, margin to get better in the second half but like at what levels?

Let me get the caveat that with, if it's renewables, yes, I don't see margin pressure.

No, no, no. I'm just talking total segment.

Yes, the total segment. Actually, I'm struggling to answer that question right now. You got a feel for it, basically what to assume.

Yes, I mean, so -- yes, so you're asking about margins this year into next year. Is that what you're saying?

I thought you guys had said there were some projects. It might have been the LNG that continue to hurt you in the first half of next year. But then when those things finish up, the margins kind of revert to normal. I'm not sure what normal is for the power segment right now.

Yes, with the LNG project in the Northeast, probably high single digits.

Yes.

Once you get through...

Once we get through the first 2 quarters.

Our next question comes from the line of Julio Romero with Sidoti & Company.

Congrats to Kate and Brook for exciting news.

Thanks, Julio.

Thank you.

So I guess on that utility segment, I mean, while you typically have that seasonal slowdown you expect in the first and fourth quarters. I mean would you expect margin improvement year-over-year in utilities in the fourth quarter. And if so, would it be by a comparable margin amount that you saw in the third quarter year-over-year?

No. I think the little bump that we got in the third quarter of this year was related to those projects in the Southeast and some closeouts and just kind of perfect weather. So as we look into Q4 of this year, I expect margins to kind of emulate our normal margins with the 1 caveat that we always talk about, which is weather and when winter is going to start, that's going to shut us down for the step up in the Upper Midwest.

And one of the benefits that we had also in the third quarter this year was that we had some work that pushed, our clients pushed it from because of the pandemic and because of getting the engineering out, the materials out like pushed from second quarter to third quarter. It was what we would traditionally have done in the second quarter pushed into the third. But our first quarter is, again, certainly in the Midwest and up North, it's going to be slow, just very traditional for us.

Got it. So traditional like 12 percentage that you got last fourth quarter in the segment?

Yes.

Yes.

Okay. And I believe you mentioned in the prepared remarks, bringing utilities and T&D under one senior executive. Can you just maybe dig into that a little bit more the opportunities you see on synergies, market share and maybe some of the organic growth opportunities you see in gas and electric?

Well, one thing is they bought -- the 2 industries, they share a lot of common clients. We have a lot -- so they have a very similar clients. So there's a benefit of pulling them in under single -- not only a single executive, a single management team because you can benefit from cost savings of doing that or the efficiency of managing now by region rather than trying to manage by business unit by region. And there's just an advantage with the relationships of the clients where we can do -- we can pull another -- create another revenue source. We're doing some work whether it be on the electrical side or gas side for a client. And we have -- now we have the other offering of doing the other work. Let's just say, it's a T&D client. We're doing electrical work for them, we can put gas line. If they have gas work to be done, we can also do that gas work. It creates another revenue stream for us. It also allows us to cross-train the employees. You can't cross-train everybody to be everything, but we cross-train a number of those employees to work in both of those businesses. So when the workload is down in one, you have opportunities because of the diversity, to be able to pick up work in the other and move those resources and continue to work.

Got it. And last one for me is I'm just trying to wrap my head around your expected kind of go-forward CapEx in maybe '21 and beyond. I mean you mentioned internal upgrades, IT systems upgrade, but I would think you probably have less construction equipment spend than relative to maybe 2019. So -- and your cash is very strong, your cash balance at the end of this quarter. So what do you think CapEx maybe ends up at '21?

For '21, I expect it to be very similar to what it is this year. We've talked about 2019 be high because of our investment in new offices, new facilities, other things like that, which we have not had this year. So we're still thinking next year we'll be somewhere in the $40 million to $50 million range.

And may be a little bit more but not much because we do have 1 facility that we're going to probably start some work on this year -- next year. But it will be very similar to this year.

[Operator Instructions] Our next question comes from the line of Zane Karimi with D.A. Davidson.

Congratulations on the quarter.

Thank you.

Thanks, Zane.

So first off, I want to touch on the stronger cash flow this quarter. Does that reflect any fees or payments related to ACP? And would those continue? As well as a little bit more detail around the strength on the quarter.

Yes. So there's no big cash fees or anything like that necessarily that came in from ACP during the quarter. There was a fairly sizable, as I mentioned in my comments, payments that we got with respect to that TxDOT settlement. That was about $30 million, and that was basically just turning working capital into cash is what that was. The rest of it, frankly, was just good working capital management. We had some very good contract terms with some customers, scheduled values, and we also had just a really good quarter of guys of the teams billing timely and getting paid timely. So great working capital management on part of all 5 segments. You can look in the statement of cash flows and see, it was just normal course, change in contract assets and liabilities and AR that drove the vast majority of it.

Okay. Got you. And then I think a follow-up on an earlier question around the power margins on the quarter. I know they're a little bit below the target range right now. But how much of a headwind to gross profit was? I think it was the Northeast LNG plant. And I couldn't quite hear you, but did you say you can get back to over 10% after 2Q next year?

Yes. So that project probably hit us for a couple of basis points during the quarter to margin. And so what our expectation is, as we work through the rest of that project over the course of the next couple of quarters, by the time we get to Q2 of next year, we should be up in that higher single digits, 9.5%, 10% range, right around there, which should be normal course for that segment.

Okay. And then last one real quick. What does the renewables business now represent for Primoris, like revenue? And where do you think that goes through '21?

Yes. We don't normally break out revenue within a segment. But it's a meaningful portion of the power segment, and it's definitely the fastest-growing portion of that segment.

Yes. You're going to see significant growth in 2021 in that segment due to renewals.

There are no further questions in the queue. I'd like to hand the call back to Tom McCormick for closing remarks.

Well, thank you. We appreciate you taking the time to be with us on this call and for your support of Primoris. I hope that all of you and your families are healthy and safe. Thank you.

Ladies and gentlemen, this does conclude today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.