Good day, and thank you for standing by. Welcome to the Primoris Services Corporation Second Quarter 2021 Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your speaker for today, Ms. Brook Wootton, Vice President of Investor Relations. Ma'am, the floor is yours.

Good morning, and welcome to Primoris' earnings conference call. Joining me today are Tom McCormick, President and Chief Executive Officer; and Ken Dodgen, our Chief Financial Officer. Before we begin, I would like to make everyone aware of certain language contained in our safe harbor statement. The Company cautions that certain statements made during this call are forward-looking and are subject to various risks and uncertainties. Actual results may differ materially from our projections and expectations. These risks and uncertainties are discussed in our reports filed with the SEC. Our forward-looking statements represent our outlook only as of today. We disclaim any obligation to update these statements, except as may be required by law. I would now like to turn the call over to our CEO, Tom McCormick.

Thanks, Brook. Good morning, and thank you for joining us today to discuss our second quarter results and our financial outlook for the remainder of 2021. Our year-to-date revenue was up more than $48 million compared to where we were last year. We raised a record $1.7 billion of revenue for the first six months of the year, despite historical wet weather conditions in Q2 that pushed some of our anticipated revenue for this quarter further out in the year. And you recall the impact of the winter storm that hit Texas in the first quarter had on some of our businesses as well. Our strategic focus on master service agreements is also showing results with 52% of our current backlog being MSA-based work, that's $1.5 billion and a record level for us. For the second quarter, we generated $881.6 million of revenue. Our outstanding revenue performance in the utility and energy renewables markets demonstrates that our investment in these areas over the past several years is paying off. This strong growth mostly offset the lower revenue in our Pipeline segment, which was expected, giving us overall a 2.9% decrease as compared to the same quarter last year. Now let's look at the three segments in detail. Our Utility segment had a strong second quarter performance with revenue coming in at $425.4 million, up 25% compared to the same period last year. This increase was primarily due to increased activity with a significant utility customer in California and the addition of Future Infrastructure, which represented approximately $72.7 million of revenue for the quarter. We continue to make progress on the integration of FIH. The integration activities are more than 70% complete, having completed 350 of the approximately 500 activities. We will continue to create synergies between FIH and our other…

Thank you, Tom, and good morning everyone. Let me begin with our key operating metrics for the second quarter, and then I'll discuss our balance sheet, cash flows and backlog. I'll wrap up with our 2021 guidance before moving on to your questions. Our second quarter revenue was $881.6 million, a decrease of only $26.6 million compared to the prior year. This says a lot about the strength of our business model given that our Pipeline segment was down over $168 million from the prior year and significant rain in the second quarter impacted our Utility segment. Despite the rain, our Utility segment revenue increased by $85.3 million with Future accounting for $72.7 million of the growth. And our Energy and Renewable segment revenue increased by $56.5 million during the quarter, primarily due to an increase in renewables revenue. Despite the overall decline in revenue, gross profit for the second quarter of 2021 was $113 million, an increase of $12.1 million or 12% compared to the prior year. The increase in gross profit was primarily due to the energy and renewables and Pipeline segments, partially offset by lower gross profit from the Utility segment. Gross margins increased to 12.8% for the second quarter compared to 11.1% for the prior year. Our Energy and Renewable segments gross profit was $33.2 million, an increase of $15.1 million compared to the prior year, primarily due to higher revenues and margins. Gross margins increased to 9.9% during the quarter compared to 6.5% in the prior year. This was mainly due to higher cost associated with the LNG plant project in the Northeast in 2020. Despite the lower revenue this year, our Pipeline segment generated gross profit of $30.9 million, an increase of $3.9 million compared to the prior year. This was primarily due to…

Thank you, sir. Our first question comes from the line of Jerry Revich from Goldman Sachs. Your line is open.

Hi. This is Adam on for Jerry today. Tom, I was wondering – how are you guys? I was wondering, in utilities, you mentioned customer-driven delays in your prepared remarks. Can you expand on that point? How has project cadence evolved into July and August? And just a bit more context behind those drivers?

So there's a couple of things that drive that, Adam. One is, really, it was just a slow start to the year and we kind of talked about a little bit of that in Q1. The projects are a little bit slower coming out with releasing work and a lot of it's because they were two-fold, really trying to get work out of engineering. And also the supply chain probably in our utilities has been hit more than anywhere else. And we haven't really talked about supply chain issues this year. But really when it comes to telecom and Electrical T&D, the components and those types of things, our clients have seen some delays, and so they’ve been a little bit slow to release that work certainly in the first quarter and into the second quarter. And we're starting to see that pickup a little bit going into the third quarter, although there is still impacts. And then, of course, we had – we talked about the order delays in February from the winter storm that we had here in Texas. And again, in the month of April and May, in Texas, we had roughly 42 inches of rain, which is really odd and different for this type of year. So between the first quarter of this year and the second quarter of this year, any businesses that we had that are largely Texas-based businesses and Future Infrastructure is one of those businesses. And we do quite a bit of a gas distribution and quite a bit of electrical transmission and distribution in the Texas area. We are impacted by – they lost as many as 10 to 20 days during those two quarters. So that's effectively not quite – just under a month that was – one month out of six.

Okay. Thank you. That's really helpful. And then specifically on the margin side and utilities, can you also just expand on the challenges that you saw in the quarter on gross margins and how you expect that to evolve in the balance of the year?

Well, some of it was related to just some businesses, but first they were part of the acquisition of Future Infrastructure that we knew weren't part of their core businesses. And with the price of oil being down, it affected some of those businesses specifically, and we're dealing with those businesses. But some of it’s also with client delays. We have crews and management teams that we have to keep even if the client delays the projects. For instance, we had a client here in Texas that would not allow us to work on their transmission systems during the month. has limitations as to what you can work on during the months from May 15 to September 15. And we had projects that were identified that we were going to work on during the summer. When those projects were paused, and I'll say, pause because the work still has to be done until after that work stoppage until after September 15, we had to find places to put those crews. And in doing that and keeping them busy, we're not going to lay lineman off and we're not going to lay quality journeymen off. So we had to find places. While we use them in places, probably less efficiently as we would have – had they been able to work on those projects and those costs are hard, those affect our bottom line as well. When you get into utilities, a lot of it's just a mix of work. So we'll work in different parts of urban environments where our margins can be a little bit higher. And sometimes when you get in the inner city, it gets a little bit more difficult to do the work, but we're getting paid the same unit rates. It affects – your margins are down a little bit. So it's kind of a little bit of all of those things.

Okay. Thank you very much.

Our next question comes from the line of Steven Fisher from UBS. You may ask your question.

Great. Thanks. Good morning, guys.

Hi, Steven.

Hi. Just to follow-up on that question about the Utility segment. Is there any way to quantify how much of that revenue wasn't booked due to the material delays? You mentioned one month effectively out of six, is that basically the way to size how much has to kind of – likely to recur or come back in the second half of the year?

Yes. We do not have that information. It's something that we're looking at, but we have not put a value on it. And again, some of them will be – work that will be done, it's going to be pushed out this year. How much of that will be actually made up later this year or will be pushed into next year? We don't know.

Okay. Fair enough.

Yes. It could be in the range of $10 million to $20 million, probably a reasonable range.

Okay. That's very helpful. And then you guys have been working to reduce the risk in your backlogs, certainly good thing. Just wondering about the risks that are going in now or poised to go in. You mentioned gas to liquids related to dairy. Is this a first of a kind project? And what about sort of the larger solar projects? How was the – it seems like the average size there is going up a bit. How does that change the risk profile of what you're doing there?

Well, let me talk solar first. I don't think the average size of the solar projects are going up and matter of fact, some of the projects were recently awarded are in the $40 million to $50 million to $70 million range and then we'll have several that are bigger. So they're still about the same size. Some of the things that we do on the solar projects and working with clients that we have long-term relationships with as we've been able to go out or the client has gone out early during – prior to the LNTP phase or during the LNTP phase and bought materials, purchased the materials, certainly those items that maybe long-lead, that kind of ensures delivery and kind of takes the risk of either price creep or a late delivery off-the-table. And then we have language in our contracts that kind of give us and some of those protect craft labor performance. We track certain metrics on a daily basis so we can see how our craft labor is performing on the solar projects. And they have certain metrics that they have to meet. And again, just as a reminder, fabricate – a construction of a solar facility is much more like assembly or manufacturing than it is like constructing in industrial facility. So you're installing the same widget a million times. So it's pretty easy to measure performance there and make corrections if we need to. The one of the kind projects, we don't have process guarantees on those projects. These are projects that have gone through feeds, where they're either in the feed stage or they've gone through a full feed. The process has been proven. The client or the technology provider provides the process guarantees. We're essentially building based off of that feed study and fabricating and constructing based off of that feed study.

Okay. Very helpful. Thanks a lot guys.

Our next question comes from the line of Lee Jagoda from CJS Securities. Your line is open.

Hey. Good morning, guys.

Hey, Lee.

So just starting with the Future acquisition, is the entire shortfall in the quarter and frankly in the first half weather-related. How should we think about the idea that we've had, call it $135 million of revenue in the first half, but we’re coming off at $340 million run rate coming out of 2020. Should we expect to get back to that level in 2021? Or what should be the run rate kind of exiting the year?

So Lee, the answer is no. It's not all weather-related. But again, given that Future Infrastructure, the majority of their business is here in Texas. We talked about that even prior to the acquisition or after the closing of the acquisition that we're going to grow their business outside of Texas, but most of it's based here in Texas, they were impacted by both the winter storm and the rain that we had in April and May. But the other things were again, as I know their clients were a little bit – suffered a little bit of COVID hangover. So they're a little bit slow releasing work, just waiting to see what's going to happen. And we'll probably get things out of engineering and then we had supplying – they had supply chain issues. Clients buy most of the components and parts, certainly on the telecom side. And so they've had some issues. To alleviate some of that, we’ve actually offered to start buying some of those because we don't have to necessarily go through all the processes and procedures they have to, and we can buy quicker than they can. That's alleviated some of the problems, but nonetheless, it delayed them, issuing some work in the first half of the year just because they couldn't get everything in and so be able to release us to do the work.

And I would expect – I don't think they're going to call back that revenue this year. I think last year they were about $350 million in revenue – $340 million. And that’ll be down a little bit this year. They are roughly $20 million to $40 million down from that, I expect that'll be. But in the future, I think that we're going to see them go back to those traditional levels. Again, we're expanding their business outside certainly in the BFW area and outside of Texas. And I think we'll see more of that growth next year.

Okay. So then that would imply a back half number above the $340 million run rate. Is that a fair way to think about it?

Well, let me qualify that because we will – we are looking at doing some things with some – a couple of their non-core businesses that we knew were non-core with them – a part of them when we bought them and those are smaller businesses, so some of that revenue will drop off if we either sell those businesses or shut them down.

Sure. And then just on the margin side of that, it looks like your gross margins in Future were about 15% in Q2. And again, I guess the bogey we were working off of was sort of a 21% to 23% gross margin in 2020. If I look to the back half of this year, are we back towards that 21% to 23%? Or are we closer to the 15%?

I think we are working upwards from the 15%, but you're going to be below at 21% to 22%.

Is that structural or just temporary? And if we think about it further out, do we return back to that 21% to 23% over time?

I think long-term we can get them. I've always said it's going to be in the 19% to 20%, maybe 18% range. I never expected to get back up for them to be operating in 21%, 22% in long-term. But I think the 19% to 20%, 18% to 20% range would probably be a better range for them.

Okay. One more just for Ken, and I'll hop back in the queue. The project close-out in pipeline. Can you quantify that, so we can get a normalized margin for Q2?

Yes. I mean, I don't have the exact numbers on those project close-outs, Lee. But as we've talked about before, it's not uncommon for this segment to normally run kind of in the 12% range plus or minus. So you can use that to kind of back into what's project close-outs are.

Okay. Fair enough. Thanks very much.

Thanks, Lee.

Our next question comes from the line of Matt Sharpe from Morgan Stanley. Your line is open.

Tom, Ken, good morning. Thanks for taking my question.

Hey, Matt.

Hey, Matt.

I just wanted to circle back to the renewables business here for a minute, specifically solar. Maybe you can just shed a little bit of light on, on how much that contributed in terms of revenues in the quarter and what it looks like year-over-year? And then in terms of the $350 million backlog that you're working off here, what does the ramp look like as we exit the first half?

Well, we don't really have that level of detail down to the business unit level. And we are still looking at those numbers. But I will tell you with respect to backlog we have in the renewable segment, right now we have about $70 million of backlog that's included in those numbers that is associated with projects that are currently under LNTP. So they're under a Limited Notice to Proceed, and those contract values range, the LNTP values range from $1.8 million to $7 million. Once those jobs – and right now we're batting at 1,000 with respect to transfer converting a project from LNTP and taking it to the execution phase. So we have not ever had an LNTP contract pulled, and we did not execute the full construction of that project when it comes to solar facilities. It's just how the business works. There's about $350 million of construction that's coming behind those LNTP contracts just associated with those full contracts. So I think I said earlier, there's a number – roughly $900 million projects that are in different phases that we haven't yet been awarded that we expect to be awarded in the next six to 12 months. And that $350 million would be in that $900 million.

Got it. That's helpful. I just want to circle back to the pipeline business, specifically the gross margins. I think probably count on one hand the amount of times you hit 26% or north of that since going public on one hand. And as you reiterated the guidance range here that looks to imply a pretty notable step down into the back half of the year, I think 4% or so to hit the midpoint of your range. What's driving the lumpiness aside from the project close-out? The project close-out is obviously explained this quarter, but the notable step down into the back half, what's really driving that?

That's really – it’s just closing out a projects. There really is nothing else.

Got it. Okay. Thank you. I'll get back into queue.

Thanks, Matt. Good talking to you.

Our next question comes from the line of Sean Eastman from KeyBanc Capital. Your line is open.

Hi, guys. Well for a second, I thought you might've forgotten about your legacy analyst. Glad to get in here. So how should we interpret the intact guidance for the full-year? Is it – we've had the weather delays in the second quarter and they're being recouped by pipeline close-outs, or have we had the weather delays here and we're going to see a catch-up and make up for those weather delays in the second half? Just trying to understand the bridge there.

It's a little bit different in every segment. We started looking at the guidance. I think beginning of the year, I would probably guess what our guidance would have been. It's still the same 230 to 250. But probably thinking mid to upper half of that guidance and – right now, I don't think we're going to claw all of that back in the second half. I think that it's probably going to be more towards the lower to the mid range of the guidance by the end of the year.

Okay. So we're going to be toward the upper half of the guidance for the full-year or the lower half? I'm little bit confused by the response.

Lower to mid.

Lower to mid. Got it. Okay. And the decreased activity with the utility customer in the Midwest, what exactly is going on there?

Well. We’re going to do gas distribution. We're replacing old piping systems. When you get finished with that build-out of that replacement work, then you move away from replacement more towards maintenance. So you go into an area, you build up your crew size, all your crews, you do both replacement and maintenance and new construction. When the replacement work is done on the old piping systems, those crews go away and you find other homes for them. And that's really what that is. We've moved into an area, and been there a long time, and you do a combination of replacement work, new installations and maintenance work. And now the replacement work, which is, I don't know what percentage of that work is. It's higher at the beginning and you work your way out of business. That's kind of what you do. And that's just kind of where we were with that client in that part of the country.

Okay. Got it. All right. That's helpful. And just lastly, the bookings were kind of late in the Energy segment in the second quarter. I think there might've been some awards subsequent to quarter, and maybe if you could just clarify the messaging there? And maybe beyond that, is this just kind of lumpiness or is there a risk that some of the project prospects for that segment are kind of going to get stuck around the supply chain uncertainty?

I actually think that what we were going to see is we expect to see some awards here in the not so distant future. I think I mentioned one during my earnings narrative that we've been told here and shortlisted on, and we really expect to hear any day now that contract is signed. You heard me talk about the four different solar projects that are in LNTP phase that they'll be awarded in the coming weeks or months. And that represents approximately $350 million worth of work. We expected that work to be actually be awarded and go from – convert from LNTP to contract in the second quarter. So it's just pushed a little bit, but we're working on the projects. We're seeing more bid activity, we're extremely busy bidding work. So we're seeing more and more activity even in our non-union industrial markets. So I'm pretty comfortable with where we're headed and I think we'll win our fair share of the work in some of this, I'm very confident because I already know where we are. We just haven't signed the contracts yet. So I don't think there's anything we're comfortable with where we are and where we're headed, probably…

Okay. Terrific. Thanks very much for the time.

Good talking to you.

Thanks, Sean.

Our next question comes from the line of Adam Thalhimer from Thompson, Davis. You may now ask your question.

Hey. Good morning, guys.

Hey, Adam.

Hey, Adam.

The material delays that you guys referenced, is that – as we sit here in August, is that something that's getting better or getting worse?

It depends on what it is, right. We're able to manage what we have in our – as far as our supply chain goes, there are things that we're responsible for buying. We get it moved. You have a tendency to get ahead of them, and we've made some investments, made some decisions to move forward on projects even before awarded to buy certain materials. Because we know – for some reason that project was curtailed or canceled or anything else, we can use it somewhere else with our clients, I think it’s getting better. I think it's changed their planning and maybe the life of the project is a little bit longer now going from engineering and procurement to the field or the release of a work order gotten, it goes a little bit longer period of time. And I think everybody's kind of adjusting to it and planning for it.

Okay. The California utility that you referenced, that was good in Q2. Is that good with gas or with electric? And then what's the outlook for that customer in the back half?

Primarily, I think mostly gas, but we're seeing some pickup in electric out there as well.

And what's the outlook for them in the back half?

If I look at the back half, I think it's just kind of continued at the rate they've been going so far this year. So in general, all of our customers on the West Coast have been active this year and kind of building momentum. It's been a consistent message across most of our geographic areas, respect to utilities. A little bit of slow in this first half of the year, Tom mentioned it. We'd like to refer to as the COVID hangover and trying to figure out how to engineer and get projects out when they've been working remotely. And so they've gotten better at it, and we've seen a catch-up on that.

And I think it's worth noting, and I'm not sure what the timing is going to be. Historically, we have gotten involved in the cleanup after wildfires, and I expect that we will do the same, replacing these systems and transmission systems, distribution systems following the clean up, and during the cleanup, following the wildfires out there. But also as they – there's one cost to specific client out there start spending money on grid hardening and going underground. I think will play a role in that too now. When that will happen? I don't know.

Got it. Okay. And then just lastly, Ken, what's the outlook for free cash flow in the back half?

Free cash flow for the back half is going to be very similar to what we've seen like back in 2019, probably as much as a $100 million to $150 million back half is our best forecast right now.

Sounds good. Thank you.

Thanks Adam.

Our next question comes from the line of Julio Romero from Sidoti. Your line is open.

Good afternoon, Tom and Ken. Thanks for taking the questions.

Hey, Julio.

Hey, Julio.

So not to beat on a dead horse on the Utility segment, but how do you expect margins to trend in utility in the back half of the year? Should we expect sequential improvement in Q3? And just thinking about what Q4 margins look like, given the headwinds you mentioned as well as the typical seasonality in that segment?

Yes. I absolutely think you'll see the normal seasonality in Q3 and Q4 like we normally see. We're normally ramping up in a bunch of areas in Q2. And so the weather impact during Q2 definitely put a little bit of a damper on those margins, but we're definitely looking for higher margins in Q3. And then Q4, Q4 will be down from Q3 sequentially, like it normally is. But where those margins fall out is always a little bit of a guess given the fact that we don't know when winter will really kick in and shut us down in some of our Northern areas.

And we had in the past – I think the Ken, I agree. I think that there's more along the traditional lines with the qualifications that he placed on it. The other thing is we've seen probably fewer project type work and more MSA type work this year, and probably expect the same going into the latter half of the year, where sometimes we get the benefit of an uptick in performance benefit on the little project work that we do in some of our utility businesses, and we're not seeing a lot of that work. Again, the MSA work is there and those margins are pretty consistent.

Got it. So just to clarify, we expect sequentially utilities margins up in Q3, down in Q4 because of normal seasonality. Do you think we see year-over-year margin growth in Q4?

Again, too early to tell for Q4.

Okay. Fair enough. I guess maybe just switching over to the renewable side. Is there any way to quantify that gross profit drag from the LNG project in the quarter either from a dollar perspective or margin perspective?

For the segment, and I'm sorry, I'm looking at something here real quick. Yes, I don't know that off the top of my head, Julio.

Okay. I guess, I am interested in – right there, the renewable energy margins. I mean, I don't know if you can speak to higher margins you booked during the quarter on renewable energy, or maybe what's the margins like in the backlog?

Yes. I mean, the margins on renewable is very consistent with that segment. Our goal for that segment is kind of the low double-digit range. And that's exactly what we're doing with respect to renewables as well, but probably the higher end of any business unit though in that segment.

Got it. And could you give us a progress update on the work you're doing with clients to kind of explore the opportunity to blue hydrogen?

Yes. We're doing some studies for clients. The benefit I guess that we have is – we have over the engineering group that we own PD&C they have probably 25 to 30 years of design and construction experience and what we refer to as gray hydrogen plants. So the only component, only thing that you add to make it blue hydrogen as you got the carbon capture. So we have a lot of experience in the design of those plants. We know what the emissions are. We know how to do that. We’re interested in doing several FEED studies right now, and actually talking to some clients about doing some of the other feeds for them on blue hydrogen projects. But it's still early days. The nice thing is we have the ability to do the pipe collection systems and we do everything, but put it in the ground as far as carbon capture and everything else. It's a strength that we have or skill that we have.

Great. Thanks for taking the questions and best of luck in the back half.

Thanks, Julio.

Our next question comes from the line of Brent Thielman from D.A. Davidson. Your line is open.

Thanks. On the pipeline business, are there any other large pipelines that could potentially contribute to close-out benefits in the second half of the year? And is there any of that in the guidance?

It is in the guidance and we still have one or maybe two other jobs that may contribute some project close-out in either Q3 or Q4. We're just not sure of the timing yet.

Okay. And Tom, Future, yes, these initiatives that move the business into new geographies. When does that start to become sort of relevant to the P&L in terms of how you guys are rolling this out Texas?

Probably next year, there's always a little bit of a cost of entry and a little time to build out from a lag as you move into new markets. So it'll be in 2022. And I wouldn't say the first quarter of 2022, but a little bit later in the year.

Okay. And on the transmission work in Texas beyond the effects of weather here. Can you talk about what's happening there? I guess just from a near-term perspective, sounds like there's some pause in activity. And then, what you are sort of hearing in terms of opportunities there?

Well, I will tell you from a transmission standpoint, there is a lot of opportunities because the solar and wind farms and all that activity of everybody moving to Texas, and I'm just telling you, this is based on what we're being told by our clients. Their annual spends are going up and that's with respect to both electrical distribution and transmission and the connections between solar facilities and wind facilities and transmission – power generation facilities and getting it out to all these areas where growth is occurring. So there's a lot of opportunities. We have some – very key clients, their spend is going up and they want us, and of course, there are other Tier 1 contractors to grow with them. So I'm excited about it.

Okay. Thank you.

Thanks, Brent.

There are no further questions at this time. I will now turn the call back to Mr. Tom McCormick, our CEO. Sir, you may go with your closing remarks.

Thank you, Carroll. In closing, I just want to highlight that Q2 2021 was the second best quarter in the company's history. And our performance over the course of the first half of 2021 is the best first half of a year in the company's history as a public company. It's best in the company's entire history. So we're very excited about where we are and where we're going. And I'll just conclude by reiterating that our business model and the opportunities we see ahead are a source of pride and confidence for me and our leadership team. Thank you all for joining us today. Have a good day.

This concludes today's conference call. Thank you again for participating. You may now disconnect.