Good morning. My name is Emma, and I will be your conference operator today. At this time, I would like to welcome everyone to the Primoris Services Corporation's First Quarter 2023 Earnings Conference Call. [Operator Instructions]. Blake Holcomb, Vice President, Investor Relations. You may begin your conference.

Good morning, and welcome to Primoris First Quarter 2023 Earnings Conference Call. Joining me today with prepared comments are Tom McCormick, President and Chief Executive Officer and Ken Dodgen, Chief Financial Officer. Before we begin, I'd 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 as of today, May 10, 2023, we may disclaim any obligation to update these statements, except as 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 Investors section of our website in our first quarter 2023 earnings release, which was issued yesterday. I would like to now turn the call over to Tom McCormick.

Thank you, Blake. Good morning, and thank you for joining us today to discuss our first quarter 2023 financial results, an update on our operational performance and market outlook. Primoris kicked off 2023 with a solid first quarter. Our teams around the country executed their jobs safely and efficiently to help us exceed our goals for safety, revenue and gross profit as well as establish another record high for backlog. We accomplished these milestones in the face of economic uncertainty caused by failing financial institutions and the increasing likelihood of a recession on the horizon. I am proud of our employees response to these challenges and I want to thank them for their contributions to our success. Their efforts in the first quarter have set a solid foundation for us to continue executing at a high level for the remainder of the year and achieve our annual objectives. Now let's look at our operational performance more closely by segment. Beginning with the Utility segment, we were able to outperform our expectations for the quarter in all of our key metrics. Revenue, gross profit and backlog. The first quarter is generally our lowest revenue and margin quarter compared to the remainder of the year. This is often due to delays from winter weather conditions and the allocation of MSA work from customers that often begins to ramp up in the back half of the quarter. Stronger-than-anticipated work in Southern California and milder weather conditions in other geographies allowed us to execute on more backlog than anticipated. We saw solid growth in our legacy power delivery and communications business that complemented the contributions from our PLH and B Comm acquisitions, where we continue to make significant progress in our integration process. The combined businesses are operating smoothly, and we are making progress…

Good morning, everyone. Our revenue of $1.26 billion was a first quarter record for Primoris and up over $472 million from the prior year, driven by growth in both of our segments. The Energy segment was up $302 million or 71% from the prior year. Our renewables business contributed over $100 million of that growth, along with our pipeline and industrial businesses. Utility segment also saw strong growth of $170 million, up 47% from the prior year, driven by expected growth in our power delivery and communications businesses. Gross profit for the first quarter was approximately $100 million, an increase of $43 million from the prior year, primarily due to higher revenue, improved revenue mix and higher gross margins. Gross margins were 7.9% for the quarter, which was an improvement over 7.2% in the prior year. Looking further at our segment results, in Utility segment, gross profit was $33.6 million, up over 50% compared to the prior year due to higher revenue and slightly better gross margins at 6.3%, this was driven by top line growth in our power delivery and communications businesses, along with some milder weather during the quarter that allowed our gas operations to see improved productivity. As is typical in this segment, we expect to see gross margins improve for the remainder of the year to achieve our 9% to 11% range following the seasonal lows in Q1. In the Energy segment, gross profit, which now includes pipeline, was $66.2 million for the quarter, a $32 million increase from the prior year due to both higher revenue and improved margins. Gross margins came in at 9.1%, which is an improvement from 8% in the first quarter of last year. The higher gross margins were a result of improved mix from renewables work, which accounted for 1/3…

Thanks, Ken. Before we open up the call to your questions, I'd like to restate a couple of key points and areas of emphasis for Primoris in 2023. First, across all our companies, we are committed to safety, quality and productivity and in that order. We believe that executing well in these areas will allow us to be the employer of choice to attract top talent to grow our share of work with our existing customers, open the door to new customers and improve profitability to grow the company to the benefit of our shareholders. Next, we are beginning to see the early signs of the benefits of recent federal legislation to increase infrastructure investment in communications, highways and bridges, renewable energy and electric grid improvements. Although still awaiting clarity and administration of financial resources in many cases, the overall trend appears to be heading in a positive direction in many of our markets. Third, we have updated our commercial strategy in the Utility segment, and we believe will allow us to offer better service to our customers and be more productive in managing our skilled labor. This includes a more product line centric sales and operating structure and increasing our mix of project work, specifically in power delivery, which now represents more than half of the segment. Finally, we are optimistic that 2023 will be a year of great opportunity for Primoris. A year with the potential to set new records in revenue and backlog as a company, but also to lay the foundation for improving our profitability and consistently generating free cash flow. Converting our revenue to cash and paying down debt remains a top capital allocation priority for us. We believe that reducing our leverage through a combination of growth and debt reduction will offer us flexibility to make further investments in Primoris to the benefit of our employees, customers and shareholders. We will now open up the call for your questions.

[Operator Instructions]. Your first question comes from the line of Steven Fisher with UBS.

Tom, you mentioned a desire to have more MSA versus project mix. Can you talk a little bit about what you think -- what the mix is you're trying to achieve there? Is it a general target range that you want to have?

Yes. Steve, we talked about it in the past, we've said somewhere between 75-30 or -- 75-25 or 80-20, something a little bit more -- right now, we're about 10% project mix. And what the projects do is they give you an opportunity to provide services to your client on small cap and larger capital projects is a little bit higher margins that will drive your margins up. And plus it keeps your pencil sharp and keeps our operations and our project management people keen. So I'd like to get a little bit higher than that 10%, certainly, somewhere around 75-25, I think, would be ideal. 70-30, we'd even go as high, but probably not more than that.

Okay. And then it's good to see the carbon capture project into backlog. Can you just talk about to what extent there's any kind of first-of-a-kind elements to that project and how you're managing that first-of-a-kind risk?

Well, it's not really first-of-a-kind. It's a pipeline project. It is a little bit smaller diameter, it's not what we typically see in the 24- to 36-inch or 42-inch gas pipelines. Probably a lot more number of tie-ins because it ties into a number of facilities, but the pace of the work that we're doing is about 160, 166 miles. So it's a pretty typical pipeline project for us, to be honest with you.

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

Just starting with the MSA renewals that you talked about on the call. Can you kind of give us some quantification of the size and scale of the renewals that you've submitted? And maybe the timing that you expect and the potential margin uplift versus current levels, assuming that you get what's in those contracts?

Yes. Lee, I don't know how many are outstanding right now, to be honest with you. But in any particular quarter, we're probably negotiating anywhere from probably $25 million to $50 million of contracts, depending on the quarter. And then with respect to margins, in aggregate, because we've already done a lot of the heavy lifting, but still have more to go, especially as we talked about last quarter for the PLH customers. I would hope and expect that we've got at least a full 100 basis points improvement coming over the course of the next year to 1.5 years at most.

Got it. And then just can we -- can you kind of dive into the segments a little bit more because now that we've rolled them up, we really can't see whether there are any meaningful puts and takes within the various businesses that impact margins. So are there -- is there anything either outsized positive or outsized negative that you would look at as something that could persist over the next several quarters that would either be beneficial or a potential headwind to margins as you look at the next couple of quarters?

I think the biggest thing we're seeing now is consistency across within each one of the segments. I think there's some improvements that we talk about late in the latter part of the year going into next year, the pipeline we're bringing to the Energy segment. But the balance of the business is in Energy are actually performing pretty well and Civil continue to contribute and be consistent in their performance. And you get into Utilities, I think there's still some benefit. There's some improvements that will be made in power delivery, but communications and gas are continuing to perform well. And I think some of the power delivery will be just as Ken talked about, it will be just renewing some of those MSAs. That's some of our more performance factors.

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

Firstly, just on the cash. Are we still on pace for that kind of $100 million to $150 million operating cash flow range? Maybe I missed it.

Yes. Good question, Sean. Yes, we absolutely are. A lot of this quarter was just timing of project starting that impacted it. But yes, we're still right on track for that.

Okay. Excellent. And then just relative to some of the commentary on the power delivery business development efforts. Some of that seems new. I just wanted to understand -- make sure I understand what you guys are trying to do there, where the margin enhancement element comes from? And also if you could comment on the strength in the legacy power delivery operation that you highlighted in the first quarter, that would be interesting to hear about as well.

So I think the improvement is going to come from taking on more project work, increasing that percentage of our overall versus MSA, which we spoke about earlier. And then there's some performance. Our Power delivery group has -- very pockets of excellence, I would say, is if you look at the different regions that they work, and we have some areas where they need -- they need an improvement. And you saw in the announcement, we talked about adding some management to help strengthen that management team, and that's what we've done, and they're taking over some of these areas that needed help. And we expect to see -- and we hope -- and we will see benefit to those individuals joining the company. So I think from that standpoint as they renew these MSAs and we take a little bit more project works, we'll help them expand their margins. You're going to see improvement there.

And then in terms of taking on more project work, is that a function of the pipeline of more project-based work, having firmed. I just wanted to understand kind of the background there.

The opportunities are there, is having the capabilities within the company. It's that we had the capabilities within the company to do that for EPC and perform it -- just doing that type of work takes a specialty type of people with the right experience, and we have those people in the company. Have had some, but not enough to really take on just an objective to grow that market, but we do now, and we're looking to grow at it.

Got it. Okay. And then last quick question just to confirm, just relative to the noise in the operating environment. It sounds like you guys are saying you're still on track to achieve that kind of big 30% plus growth outlook for the solar operation. Is that correct?

That is correct.

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

Maybe staying on solar. I'm not sure if you guys broke out how much the solar revenue was in the quarter?

I said it was about 1/3 of the segment revenue for Energy.

Okay. Got it. And could you speak to the conversion rate of the backlog you did on the solar and if we should expect to see the same kind of rate as we progress throughout the year?

Yes. Conversion rate has been very consistent there. Again, as we talked about before, we have a great set of customers. We have been adding customers every year for the past few years. And I don't think we've seen any degradation of our conversion rate. If anything, it's maintained or gotten a little bit stronger.

Got it. And then just last one is just on the -- you talked about the delay on the IRA guidance, still causing some hesitation on the solar side. Can you just maybe talk to how you think orders might trend after that IRA guidance is issued and just give us a sense of how much pent-up demand might be there?

Yes. I'm not sure I can give you how much the demand might be, but our expectation is that they will definitely accelerate -- the opportunities will accelerate. Once clients get a clear definition of what those expectations and requirements are and understand what contractors they can work with that meet those requirements. We expect it to accelerate.

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

Can you level set us a little bit in terms of how you expect the ramp to take place this year from Q1 into Q2 and then Q2 into Q3 and then probably a seasonal falloff in Q4. I'm just thinking on the EBITDA side.

Yes. On the EBITDA side, I mean, I don't have -- I can't give you the exact cadence of that, but it's going to be progressively higher as we move from Q2 into Q3, just like normal and depending on the timing of projects, especially some of the solar projects, we may see a little bit less of a drop-off in Q4 than we have in previous years. But overall, it should be very similar and a good strong year for us.

Okay. Helpful. And then second question would be under your Utility MSAs. I guess we're in the May now. So are you seeing any budget cuts from your customers due to macro? Or would you say your customers still have a lot of work to get done for the rest of the year?

We have not seen any cuts. Our expectations is that our clients have a lot of work to be done by the end of the year.

[Operator Instructions]. Your next question comes from the line of Brent Thielman with D.A. Davidson.

Tom, Ken, when you think about the contract renewal process and Utilities, it sounds like that process sort of continues into next year as various contracts come up. Does that ultimately keep you from getting to the upper end of the margin range for that segment this year? Or I guess, the other way to ask this is what other elements could get you -- still get you there out of this year?

Yes. Just -- sorry, Tom and I were looking at each other on that one. Look, what's going to drive us to the top end of our range on Utilities is two things. First of all, continued contract negotiations. There's no question about that. But the second one is what Tom referenced which was our mix of MSA versus project work. Right now, it's below our target level. As we -- as that mix trends toward up from kind of 10% up to as much as 45% like we're targeting right now, that will drive the margins up towards the upper end of the range as well.

And there's still a shot at that this year, Ken, I guess, that is what I'm asking.

I mean, right now, we're expecting kind of the midpoint of our range, probably high 9s to around 10% this year. But yes, if we're able to pick up some more project work toward the end of the year, we could definitely see margins trend above the 10% range. Maybe closer to 10.5% overall for the year.

You should see them trend up as the year progresses.

Yes. Okay. And maybe just taking a step back, you guys' views of PLH having owned it for a few quarters now. I mean, how do you feel like it's integrating into the overall company? Any thoughts there.

No, I think the integration is going well. We definitely are happy to have the craft resources and the equipment and key members of their management team are performing well. We have some pockets of that business that are actually performing better than we had expected. So I think it's a -- they are welcome addition to Primoris.

Okay. And just lastly, what sort of opportunities are you starting to see become available for LNG on the Gulf Coast performance? And how significant could these be?

Well, we're not a general contractor when it comes to large LNG facilities, but we do, do some contract work for a number of the contractors, and it's created a number of opportunities for us. So I think it's from a standpoint of specific businesses, it's a great opportunity for our Energy group on the industrial side. Other businesses, it won't affect.

There are no further questions at this time. I turn the call back over to Tom for closing remarks.

Thank you, operator. We appreciate your questions and your investment for Primoris. I'll just close by recapping what I see as the 3 key takeaways from this quarter. Our strong first quarter results have set us on a solid path toward achieving our 2023 goals. We see opportunities to advance our strategic growth markets in renewables, communications and power deliveries, driven by secular market tailwinds and through offering services to our customers that leverage expertise across our segments. And finally, we will remain disciplined in how we bid work, diligent in the execution of projects and mindful of the allocation of resources to improve profitability and generate consistent cash flow. Thank you, and we look forward to updating you next quarter.

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