Hello. My name is Lisa, and I will be your conference operator today. At this time, I would like to welcome everyone to the Primoris Services Corporation Second Quarter 2022 Earnings Conference Call and Webcast. [Operator Instructions]. Thank you. I would now like to turn the call over to Mr. Jeremy Apple. Please go ahead, sir.

Good morning, and welcome to Primoris' Second Quarter 2022 Earnings Conference Call. Joining me today are Tom McCormick, President and Chief Executive Officer; and Ken Dodgen, Chief Financial Officer. Before we begin, I would like to make everyone aware of certain language contained in our safe harbor statements. 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. In addition, during this conference call, we will make reference to certain non-GAAP financial measures. A reconciliation of these non-GAAP financial measures are available on the Investor Relations section of our website. I would now like to turn the call over to Tom McCormick. Tom?

Thank you, Jeremy. Good morning, and thank you all for joining us today to discuss our 2022 second quarter results along with our updated financial outlook for the year. I am pleased to report that we generated $1.02 billion in the quarter. This was the highest revenue quarter in Primoris' history. We expect this to be the first of many billion-dollar-plus revenue quarters as we continue to progress our strategic objectives. Our performance this quarter was led by continued strength in our growth markets, Utilities and Energy/Renewables, which entirely offset revenue declines in our Pipeline segment. Over 94% of our revenue during the quarter was driven by the Utilities and Energy/Renewables segments. We increased backlog for the fourth consecutive quarter, an increase of nearly 60% above the prior year period, highlighting our accelerated expansion into higher-margin growth markets. In addition, our acquisition of PLH Group, which we announced at the end of the quarter, marked a key milestone in our strategy, helping us enhance both the size and scale of our operations in both power delivery and gas utilities while advancing our shift towards recurring MSA revenues. We faced some challenges during the quarter, stemming from increased fuel and labor prices in our Utilities segment as well as continued low revenue and margins in our Pipeline Services segment which pressured the margin for the quarter. However, our teams have done a tremendous job of working closely with our customers to negotiate increases to our MSA rates in order to mitigate the impact of inflation moving forward. Now let's look at our operations by segment, beginning with Utilities. Our Utilities segment revenue came in at $476.1 million, a 12% increase over the prior year period. We are continuing to drive stable growth within both our power delivery and communication businesses as…

Thanks Tom, and good morning, everyone. I'll begin with our key operating metrics for the second quarter, followed by our balance sheet, cash flows and backlog. As Tom mentioned, our second quarter revenue was a little over $1 billion, a new record for us and an increase of $141.3 million compared to the prior year. This was driven by continued strength in our growth markets, partially offset by weakness in Pipeline Services. Our Utilities segment increased $50.7 million, primarily driven by increased revenues with existing customers in power delivery and in communications. Energy/Renewables revenue grew by $151.3 million, primarily due to growth in our renewables business as well as growth in our industrial businesses. Pipeline revenue decreased by $60.7 million on continued weakness across the entire industry. Gross profit for the second quarter was $92.1 million, a decrease of $20.9 million, primarily driven by lower volumes in our Pipeline segment and higher cost in our Utilities segment, partially offset by higher margins in our Energy/Renewables segment. Gross margins were 9% for the quarter compared to 12.8% in the prior year. Now let's look at each of the 3 segments. In our Utilities segment, gross profit was $40.4 million, an $8.5 million decrease from the prior year due to lower gross margins, partially offset by higher revenues. Gross margins declined to 8.5% compared to 11.5% in the prior year due to the impact of higher fuel and labor costs during the quarter. With the rate adjustments that we recently negotiated with many of our customers going into effect in July, we expect gross margins for the balance of the year to be back in our normal range of 11% to 13%. For the rest of the year, we continue to see strong demand from our customers and expect to see our…

Thanks, Ken. Looking ahead, we are increasingly focused on the Utilities and Energy/Renewables markets and less so on pipeline construction, which made up less than 6% of our revenues this quarter and will continue to be a smaller part of our overall business going forward. We have a strong momentum in our growth markets, highlighted by nearly $1.4 billion of new business we brought in between our Utilities and Energy/Renewables segments. With the updated outlook that Ken just provided , we expect the following for the full year: Our Energy/Renewables segment to grow approximately 40% to 45% compared to last year. Our Utilities segment to increase in the range of 15% to 20%. And our Pipeline segment to finish the year below last year between $280 million to $300 million. We have a solid growth trajectory, supported by the ongoing strength of our business. The work we are both pursuing and capturing is aligned with secular market themes, including next-generation broadband infrastructure, power delivery and renewable energy. These all tie together to support the overarching goal of achieving a net zero future. We are keeping a close eye on government legislation, including the Infrastructure and Jobs Act, which should drive shovel-ready projects for rural broadband and urban 5G deployments, significantly creating growth opportunities with our Utilities businesses as well as several of our other businesses. The transition to renewable energy sources has served as a major tailwind and we are well positioned to capture these growth opportunities as we continue to execute on our strategy. With the PLH acquisition, we have added a new range of capabilities to our portfolio which we will continue to develop and leverage to spur further expansion into the power delivery and gas utilities markets. With all these factors in mind, we see a bright future ahead for Primoris and look forward to continuing to drive long-term growth for our business. Thank you again for joining us today. I'll now hand the call over to the operator for Q&A. Operator?

[Operator Instructions]. Your first question comes from the line of Jerry Revich with Goldman Sachs.

I was impressed with your ability to ramp up in the renewables segment. Can you just talk about if you folks were able to bring additional crews online or what drove the sharp sequential acceleration in revenue burn in the quarter.

Well, Jerry, we've been growing, building crews all along. As I noted earlier, we're also in the distributed generation now. So we were able to redeploy, I guess, some of our Pipeline resources and employees either over to take on that new operation with renewables for distributed generation. And so that's helped grow that. And we have a little over $100 million worth of work there. And as I noted, we have about another $150 million worth of work that we expect to execute on before the end of the year. So that's part of it. But the other part of it is we're continuing consistently trying to build teams and growing teams. And as we do, we can take on more capacity, and that's what we've been able to do and achieve -- of course, there's a huge funnel of work. And as I noted in previous calls, we have various renewables projects in different stages, whether it be LNTP or we're bidding or we're actually pricing for our clients and negotiating contracts, we've been able to build on the strength that we have in that group and just continue to discuss and win work.

And for the solar business, specifically, are you at 7 crews? Or are you higher than that?

Yes. I wouldn't know. We're adding -- we're building our seventh and eighth crews right now. I think we're finished -- just about finished with our seventh crew and we're building our eighth crew. And they're in -- most of these employees are on board, they're just in training and development.

Super. Okay. Great. And then can we talk about the Utilities segment. As we're pushing pricing now under a normal seasonality, your third quarter margins look pretty similar to second quarter margins. I'm wondering with the price increases that you spoke about in your prepared remarks, how much should we be looking for margins to expand sequentially 3Q versus 2Q?

Well, they should go back to where they traditionally are, although they'll be diluted by it, when you look at the total year just based on the first and second quarter results. But they're going to go back to traditional percentages going forward. So we were successful in negotiating them. We weren't successful in negotiating them to be retroactive. So -- but on a go-forward basis, they look very good.

And just to put a finer point on that. I think normally, in the back half of the year, you folks run about 13% in Utilities gross margins. It sounds like we should be thinking about going back to that level of profitability?

Yes, Jerry, in my remarks, I think I said 11% to 13% in the back half of the year. And of course, it will be shaped like it normally is.

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

It's Pete Lukas for Lee. I think you touched on it in the prepared remarks, but in terms of the guidance, can you quantify the expected accretion from PLH in '22 implied in the range? And also would -- sorry, also excluding PLH, would you expect the cadence of total revenue for Q2 to be up, down or about the same sequentially?

So the PLH contribution is going to be $0.09 at adjusted EPS for the last 5 months of the year that they're part of us. And then, Pete, what was your second question? I want to make sure I'm clear. Could you ask that again?

So excluding PLH, would you expect the cadence of total revenue to be up, down or about the same sequentially for Q2?

Up.

Fantastic. And then to the extent that fuel costs have impacted margins in the Utilities segment, can you quantify that impact? And how are discussions going with clients to potentially recoup some of these costs?

Well, the impact is the 3% difference from last year to this year in margins in the Utilities segment. That's the primary place we've seen it. We've seen it a little bit in the other 2 segments, but it's really -- the vast majority of our fleet is in the Utilities segment and that's where we've seen the impact. As Tom mentioned, we've had significant negotiations with some of our largest customers there. We've had great response from them. Those rate changes go into effect July 1 or did go into effect July 1. And we're expecting the benefit of those rate adjustments for the balance of the year.

One thing I'd add is that our Utilities segment probably drives 3x the miles of our other two segments combined in any given quarter. So they have the largest part of our fleet and equipment. They drive the most miles, they burn the most fuel.

Your next question comes from the line of Steven Fisher with UBS.

I just wanted to ask about the Pipeline segment and what do you think is going to be different about maybe the revenue mix in the second half of the year. I know you said kind of modest revenue growth over the second quarter level. But you would have a pretty big ramp-up in margins on just a modest revenue growth. So what's going to be different about maybe the mix there that enables you to get to that mid-single-digit margin there?

Yes. Good question, Steve. Two things. First of all, just in Q2, we still had that one job up in West Virginia that took the loss last quarter. It was burning at zero margin this quarter. It's done now, which is great. I'm glad to have that one behind us. So the revenue that we'll have at back half of the year, even though up only modestly, as I mentioned, should be burning at more normalized margins or closer to normalized margins. We're still going to have a little bit of the underabsorption issue, but we have begun, as of a couple of months ago, begun cutting costs in order to minimize that impact. And between the 2 efforts, that should get us kind of into that low single digits like we talked about.

Okay. That's helpful. And I don't think you could clarify, but did I hear you say that you have addressed costs in the Utilities segment at 40% of your customers? And if that's right, I guess how should we think about the other 60% and how that sets up for 2023.

So the 40% of our customers represents the majority of our largest customers. So that's where most of our revenue spend will be. The balance, we're still either negotiating with or the customers have informed us that they're not going to be able to make any adjustments until -- these things are -- typically they have an annual trigger that triggers them -- the adjustments, and that they'll have to wait on those. So we'll either see those adjustments based on when they come up for the contract or the MSA terms, or we're still negotiating and some of them, we'll have success. With some, we may not.

Okay. And then just lastly, if you could just clarify the cadence of EPS, adjusted EPS for the second half of the year, because I think you have to average about $1 a quarter to hit that midpoint. So I guess I'm assuming it's more weighted towards the fourth quarter. But just is there any other color you can provide there?

Yes. That's a good question, Steve. It's actually going to be fairly evenly weighted between Q3 and Q4. We think both quarters are going to be right in that dollar range.

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

A clarification question to start. Towards the end of your prepared remarks, Tom, I think you said the segment sales guidance of Energy/Renewables to grow 40% to 45% and Utilities 15% to 20%, and I think that's a reverse of what's on the slide deck. So I don't know if I misheard you or if you could clarify the segment sales revenue growth target for '22.

It is. And I'm just turning to the slide, to the slide you're referring to, it is incorrect in the slide deck, it needs to be corrected. The Energy/Renewables will grow 40% to 45%. Utilities will grow 15% to 20%. Sorry about that.

We'll get that corrected and repost.

Got it. No worries. That clears up a lot of my questions here, I guess. The increase in fuel prices and labor cost on the Utilities side, do those rate benefits hit? I know you talked about 40% of your clients, you've done that successfully. Do the rate benefits hit immediately as of July 1? Or do you have to get through some existing projects, backlog before you see that benefit on the P&L?

The rate became effective on July 1.

Okay. So you see that July 2 on your P&L? Or does that take later, I guess?

Yes. We see the benefit starting July -- that day.

Okay. Okay. Perfect. And then just last one for me is thinking about your -- the solar side, are you seeing any impact from the ULFPA on your customers? And are your customers seeing any project schedules getting pushed out? And how does that affect the variability of your billings in the back half?

We've had some projects that have seen some delays in delivery of modules, but not all the modules in their entirety. So again, you were able to just a job you say all the modules were going to be delivered late. We could still execute 90% of the work and then come back later and install the modules. So it doesn't really have a big impact. There are some projects where we're going to have to send crews back. But for the most part, the majority of the work is already complete.

Your next question comes from the line of Sean Eastman with KeyBanc Capital Markets.

I just wanted to come back to the Utilities segment margins. In the investor materials, you guys highlight both fuel and wage inflation in terms of contributing to a drag on margins. I think in the Q&A here, Ken, you suggested that the year-on-year decline was pretty much all fuel. So I just wanted to clarify that because that's obviously quite important as we think about the go-forward expectations.

Yes. Good question, Sean. So -- and let me clarify that. It is both fuel and labor inflation. So -- and I think that's an important point, right? Because fuel inflation, we've seen across the board, across all of our markets nationwide. And that's probably -- I don't have the numbers in front of me right now, but that's probably about 1/3 of the impact. The other 2/3 is labor, which is more specific to certain markets. We haven't seen it across the board, labor inflation. We've only seen it in a few critical markets. And so that also dovetails in with the 40%, right? The 40% of the customers that we've negotiated with has been focused on a combination of labor and fuel. And in particular, those markets where we've actually seen labor inflation.

And we've gotten adjustments to both. [indiscernible]

Okay. That makes total sense. And do you guys feel that you have enough of a cushion or a handle around this dynamic within what you embedded in the guidance for the PLH business?

Yes, we feel really good. We have spent a significant amount of time, both between announcement and closing and even since we closed about 1.5 weeks ago, working with them closely, understanding -- continuing to understand the depths of their contracts, their business, their relationship with the customers and what they expect at the back half of the year. So we feel very good about the numbers that we've put in here.

Okay. Got it. And then just staying on the labor inflation side, I mean, I think the fuel drag was to be expected. We had a big spike there. I mean, pretty straightforward. But I think on the labor side, you -- I would have thought you guys would have a pretty firm handle coming into the year on what wage inflation was going to look like and what it's going to cost to deploy labor resources in a particular region. So how would you frame what's kind of caught you off guard here in the first half from that perspective, maybe just in terms of what's happening, boots on the ground and some of these higher wage inflation regions.

I think the biggest factor is when you start and get into power delivery, and you're talking about lineman journeyman, that is where we've seen the biggest increase in wages. Look, it's a very limited resource. It takes a number of years to develop that skill set internally and for them to develop it, even going to the specific schools where they're trained. So it's -- we've seen, and I think everybody was probably surprised, although we've seen it go up and how dramatically it's gone up over the past couple of quarters. So it's just a very high demand labor market with very limited resources. So you're going to have to pay the higher wages to be able to get those resources and get them to stay.

Okay. Got it. And then just one last quick one for me. Just on the same topic. As we look at this huge backlog growth in the Energy/Renewables segment, do you guys feel good about the labor resources you already have in terms of being able to execute on that incremental backlog? Is there any risk where you see this heavy wage inflation bleed into that part of the business as well as you kind of continue to accelerate?

We do labor surveys in every market that we estimate a project in our renewable business. So we kind of know what the wage rates are in those areas and then we put contingencies on those for inflation. Those jobs had a very specific start and end dates, so they have a very short life cycle. So if we missed it a little bit, it's not going to hurt us a lot. It's also easier to train those skill sets than it is a lineman journeyman or someone using fiber.

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

I guess this is more of a PLH question, but do you expect your Utilities fixed backlog to increase when you add them? I'm just thinking about how much they're bidding on individual transmission projects and things like that.

The vast majority of their work is under MSAs just like ours. So it will be almost all, in the Utilities segment, almost all MSA backlog increase.

Okay. And then I guess a quick question on the sale leaseback in terms of why now, what the ongoing savings could be and is there more you can do on that front?

There's a little bit more of why now. It just -- it was just purely opportunistic. The opportunity came along. It's in the Southern California market. Literally, I don't -- I think I'd speak honestly here, we were not actively planning to sell this. We had unsolicited inbound calls coming in and we had so many that we felt like it was worth looking at. We had no idea that we were sitting on a piece of property that was potentially worth that much. So it was a great windfall. It was a great strategic decision for us. I don't have the quantification of the cost reduction on a go-forward basis. I think that's going to -- that's going to be worked out over the course of the coming quarters as we really solidify the new locations that we're going to be moving into, that we've already identified, I just don't have those numbers in front of me.

Look, we have assets everywhere that we evaluate and look at. Do we need it? If we don't, can we move it? Is it the right market to move it in? Same thing with -- we do the same thing. So we're constantly reviewing that and evaluating what the need is and trying to look long term, is it there a need? Or is it -- can we consolidate? And there's a benefit in doing that.

Okay. And lastly, I guess I'm just kind of reading between the lines, but it seems like Future is performing pretty well for you guys this year.

They are. They are. They're doing exactly what we thought they would do when we bought them.

Your next question comes from the line of Brent Thielman with D.A. Davidson.

Great. Ken, is there a way to break out the backlog in energy between sort of renewable, solar, civil and then everything else?

Yes. I don't know that I have those numbers in front of me though.

I thought it was in the presentation.

Yes. I'm sorry, Brent, I don't have it in front of me right now. But I think we were still kind of just north of $1 billion in backlog just for the renewables piece of that segment as of the end of the quarter.

And is it your guys' expectation that solar could grow more than 30% this year?

Yes. Absolutely.

Yes

And then on the pipeline side, I mean it sounds like you're taking some action, some cost out, you talked about kind of more of an emphasis on the integrity side. Are you -- I mean are you structurally sort of resizing this business? Or you still have all the capabilities you had before? I was just curious about your comments around that.

We still have the capability to construct pipelines, interstate pipelines. We may not have the capacity to do as many spreads as we once used to just because there's no need to carry that much fixed costs. We still have the same management team. We still have same key field personnel. We're just utilizing some of those in other areas right now to tell -- keep those costs down and mitigate those costs. Others, we let go and we'll continue to evaluate whether we need to do that or not. We are seeing some bid activity, which is pretty promising, although it will be for work that happens in 2023.

Yes. Okay. And then I was also -- Tom, you just made your comments around your ability to leverage the renewables awards within the Utilities segment. How far does that reach? Does that require a big investment in kind of new resources, equipment and utility? Just was curious if you could elaborate on what you're seeing there?

We already have the skill sets. We already have the equipment and the tools. PLH helps augment that. I mean it's just really substations. It's connections to the grid. It's everything associated with that. There was a service that we couldn't offer to our clients previously now, but that -- the addition of PLH just expands our capabilities.

And is that allowing you to win more work relative to some of the competition out there, Tom? I guess that's what I was curious about.

I mean, I would say -- it's really hard to say. But I think we're seeing more and more clients like us, like the fact that we can do everything. We can design one of their facilities. We can build it all the way out to tying it to the grid. And they like having one throat to choke, I guess. Maybe that's the wrong way to put it, but that's one contractor responsible for all the work.

At this time, there are no further questions. I would like to turn the call back over to Mr. Tom McCormick for closing remarks.

Thank you, operator. We appreciate your questions today and thank you for your investment in Primoris. I'll close this call by reiterating the key takeaways from the second quarter. We continue to accelerate our focus on Utilities and Energy/Renewables, highlighted by the acquisition of PLH, while focusing less on Pipeline. Our growing backlog represents the strength of our business and the size of the opportunities that lay ahead of us. And our growth strategy is centered around capturing long-term secular trends which will both expand Primoris while helping advance our society as a whole. I want to thank all of our employees for working safely and efficiently every day. We cannot do the things that we do without their commitment and hard work. Thank you again, everyone, and have a great day.

This concludes today's conference. You may now disconnect.