Ladies and gentlemen, thank you for standing by. My name is Cheryl and I will be your conference operator today. At this time, I would like to welcome everyone to the Primoris Services Corporation Third Quarter Earnings Conference Call and Webcast. [Operator Instructions] I would now like to turn the call over to Vice President of Investor Relations, Blake Holcomb. Please go ahead.

Good morning and welcome to Primoris third 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 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 as of today only November 8, 2023. We disclaim any obligation to update these statements, except as maybe 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 and our third quarter 2023 earnings press release which was issued yesterday. I would like to turn the call over to Tom McCormick.

Thank you, Blake. Good morning, and thank you for joining us today to discuss our third quarter 2023 financial results and operational performance. Q3 was another strong quarter for Primoris, surpassing Q2 of this year to deliver another record for both revenue and gross profit. We also hit a new high for a total backlog for the eighth consecutive quarter up around $100 million from the second quarter to approximately $6.7 billion. We have been able to achieve these milestones by earning the trust of our clients through consistent, safe execution and approaching each customer relationship as a partnership in order to deliver positive outcomes. Of course, this can only be accomplished with our employees emphasizing our core principles each day in performing their duties. I want to thank and congratulate them for all they do for each other, for our customers and for Primoris. In the midst of economic uncertainty and geopolitical challenges, we have shown the ability to focus on good execution and manage our business at a high level, while we are mindful of risk to our industry and the global economy. Over the past several years, we believe we have positioned Primoris to effectively manage through economic cycles due to our investments in renewables, power delivery and communications. With a more resilient portfolio and mindset centered on controlling the things that we can control, we believe that we can continue to have similar success in the future. The U.S. will continue to need to invest in many of the infrastructure solutions we provide in order to meet ambitious emissions goals and to remain competitive in the global economy with a growing demand for safe, cost-effective and reliable energy. Now I will move on to discussing our operational performance more closely by segment. Starting with the Utility…

Good morning, everyone. Revenue for the third quarter was a little over $1.5 billion, an increase of $245 million from the prior year, driven primarily by growth in both the Utilities and the Energy segments. The Energy segment was up over $213 million or 32% from the prior year, driven by growth across all business lines: pipeline, renewables, civil and industrial. The Utility segment was up $32 million or 5% from the prior year, driven by double-digit gains in power delivery, partially offset by slightly lower volumes in our gas utility operations. Gross profit for the third quarter was approximately $174 million, an increase of $19 million or 12% from the prior year, primarily due to higher revenue and improved gross margins in the Energy segment. Gross margins were 11.4% for the quarter, which was down slightly compared to 12.1% in the prior year. Turning to our segment results. In the Utility segment, gross profit was $64.7 million, down $13.4 million or 17% compared to the prior year. The decline was primarily due to productivity challenges on certain legacy PLH projects and lower gas utility volumes during the quarter. These factors also contributed to gross margins declining to 10% compared to 12.7% in the prior year. We believe that we are moving past the margin challenges that impacted our power delivery business. The completion of these lower-margin projects, combined with our renegotiated base rates, improved equipment utilization and a growing mix of project work has us well positioned for margin improvement in power delivery and the overall utility segment heading into 2024. In the Energy segment, gross profit was $109 million for the quarter, an increase of $32 million or 42%, over the prior year, primarily driven by higher revenue and margins in the renewables and pipeline businesses. Gross margins…

Thanks, Ken. Before we take questions, I’d like to summarize some key takeaways from the quarter. First, I want to again highlight our employees’ efforts through the first three quarters of the year. We place a great emphasis on safety and productivity, and they are delivering both at a high level. Safety is an important metric, not only for the obvious reasons, but because our employees are our most valuable asset. We want to continue to drive that into the overall culture of the company. It is also a critical factor in our ability to continue working for existing customers and attracting new customers. Second, despite macroeconomic challenges, we are seeing a lot of positive momentum across many of our businesses. In the Utility segment, we are benefiting from a growing power delivery market while working to improve margins by getting past some underperforming projects and contracts we acquired. We are also gaining share in communications and effectively managing our gas operations business despite a slight slowdown in the market in 2023. The Energy segment continues to gain momentum in renewables, and we are working to stay ahead of potential challenges that could slow or impede the progress we have worked hard to achieve over the past several years. In the industrial businesses, we are optimistic and excited about the significant growth potential that lies ahead and confident in our ability to execute on a solid backlog of projects. In all of our businesses, we are approaching each bid, each contract and each project with the goal of delivering great service for our clients while improving our profitability and cash flow. Primoris has had a great 2023 thus far and we are in a great position to achieve the operational and financial goals we set for ourselves by finishing strong in Q4. This will require us managing our business to adjust for seasonal impacts executing on work with high quality and productivity and winning work to set us up for an even better year in 2024. I am proud of the successes we have shared as a company and believe that we are moving further down the path of consistent, successful execution. Continuing down this path we believe, will lead us to margin expansion and improve cash flow generation that will allow us the flexibility to pay down debt and make investments in the most attractive markets in which we operate, and ultimately to the benefit of our customers, employees 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. Steven, your line is open.

Thanks. Good morning. I wondering if you could just maybe give us some color on the – how big the impact of the PLH projects were in the quarter, the impact on utilities margins. Curious what the margin would have been excluding that? Because it seems like the Q4 implied is a pretty big step up to hit the midpoint of that range. I’m wondering if those MSA renewals that higher margins are already expected to ramp up in Q4 is there just something else but helping that Q4 implied?

Yes, Steve, the impact was just a few million dollars for the quarter, but on that revenue, it took us down by 75 to 100 basis points compared to what we were expecting. But we think we’ve got most of that behind us. Q4 margins are going to be sequentially lower like they normally are due to the timing of winter kicking in and a lot of our customers shutting down for the holidays. So we’re expecting full year gross margins for utilities to be at the bottom end of our range.

Okay. That’s helpful. And I’m wondering if you could talk about what’s happening in the gas segment. You’ve mentioned some slowdown and some push outs. Can you just give a little bit of color there?

It’s really just some work out West, that was pulled forward a little bit. And we will probably see some more push also. So there is always a possibility when you do this on a – look at this work on a quarterly basis, it ebbs and flows. Clients – it’s really their money to spend, so they spend it when they want to, all we do is provide a service for them. But there was some work that was done earlier this year, they have decided to slow down. They have either reached their budgets or decided to curtail their spending towards the end of the year – the last part of the year. It’s nothing major.

Okay. And then just last. You mentioned you’re booked for 2024 renewables. How confident are you in all that work proceeding as planned, given some of the dynamics that are out there in terms of the interest rates and clarity around tax rules? I know you mentioned some of the smaller developers were going to speed to the bigger ones, right? How do you feel about your own book of business? Do you see any delays within that relative to the risks that you mentioned?

For 2024, I don’t think so. I think we’re very comfortable with where those projects are. We’ve partnered with some very good clients, very reputable. And we’ve been involved with their projects for months before we even sign the contracts. So we know where they are with respect to the financial position on the projects. We know where they are with respect to delivery of the key components for the facilities that we’re building. So I think we’re pretty comfortable with ‘24, ‘25, it remains to be seen, but we will see.

Okay, thank you very much.

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

Hi, good morning. Ken, I guess, first, can you quantify the closeouts in renewables? And as you look out to Q4, are there any additional closeouts that we could expect to hit margins positively?

Yes, I don’t have the exact numbers, Lee, in front of me on renewables. I think it contributed roughly 50 basis points to margin for that segment this quarter. And then right now, we’re not anticipating any significant project closeouts in Q4. We have a lot of projects that are actually going to be starting up in Q4, which is why we will probably see revenue in that segment up sequentially in Q4 compared to Q3.

And I think you mentioned some of the mix was maybe lower margin in Q4 versus Q3 in energy. Is that correct?

Correct. Yes, because of that.

Got it. Just one more on cash flow. How should we think about the level of free cash flow generation in Q4? And then as we look out to 2024, has anything changed relative to the contracts that you’re going to start versus the stuff that we’ve seen over the last year that should help smooth out some of this free cash flow?

No. To answer your last question first, I think cash flow is going to continue to be relatively seasonal within the Utility segment, but within the Energy segment, it’s going to be lumpy based on the starts and completion and the completion of projects. With respect to free cash flow, I think we are going to have our seasonally strong Q4. I did not at all believe it’s going to be as high or as strong as it was last year. Last year, everything just kind of all came together in Q4, whereas this year, we’re seeing some benefit in Q3. And depending on the timing of projects completed and new projects starting up, we could see some of Q4 cash flow actually slip into Q1, which is not uncommon and similar to what we had happened 2 years ago.

Great. Thanks very much.

Your next question comes from the line of Jerry Revich with Goldman Sachs. Jerry, your line is open.

Yes. Hi, good morning, everyone. Tom, I’m wondering if you could just update us on your ability to ramp up crews in the solar business. I think you were planning to have 15 crews at year-end. Can you talk about are you folks on track for that? And what are the plans for next year? And separately, you mentioned a number of risk factors for the industry. I just want to make sure nothing has changed in terms of the contract structures that you folks set up where any delays don’t impact your margin profile, it’s more of a function of top line impact for you folks when that happens or at least it’s been historically. And I just want to make sure that’s still the case given the cautionary remarks that you included earlier in the conversation. Thanks.

I will answer your last question first, so I don’t forget it. But we have not changed our language in our contracts. We still have the same protections. We are still doing some pre-investing also to make sure that we have the materials and the components that we are responsible for. But as far as the client obligations, they still remain in our contracts. We have not changed those. And the clients haven’t really forced us to or pushed us to either. So, we are pretty much aligned with clients that have surety of supply and I think they are fairly comfortable that we have seen it ease up delivery issues, ease up going towards the end of 2023, and they expect to see even improvement in 2024. So hopefully, that will not be an issue, and we don’t expect it to be in there, even if it is, it’s not our risk. The first question, yes, we are right on track. We are trying to build 15 crews by the end of this year. And we are racing – we have got our 14th crew already onboard and training. We have got parts of our 15th crew onboard right now, and we expect to have them in place by the end of the year. And next year, we are looking at some growth next year, and we will just grow our teams based on what that growth is to support those project needs.

Super. And then nice to hear the constructive outlook on ‘24. Can you just expand on the growth levers that you have in utilities? It sounds like pretty good pipeline in renewables, but utilities, as Ken mentioned, it can be hand to mouth. So, is it visibility on the margin profile improving or what gives you the constructive growth comments visibility that you alluded to in the prepared remarks for ‘24?

One is definitely that. I think with these MSAs that we have renegotiated, some of those took – went into effect in ‘23, the balance some going to effect in 2024. So, we had that working in our favor. The other thing is we have made a lot of changes within our power delivery group, brought in a lot of talent. And we expect to start seeing – when we are seeing it now as we close out ‘23, we are seeing margin improvement as we close out. You can’t do a whole lot with troubled projects, you have got to get through them. But in the new work that they have taken on, they are performing well. So, we expect that to carry on into 2024. I think our communications business is performing extremely well. I think sometime during the course of the year 2023 they had one project that was a little bit of a draw on them, but they are finishing – they finish that job up and that’s behind them for the most part. In gas, it’s not a fast-growing market for us, and we will probably be fairly flat with maybe some growth in that business. It’s a well-performing business for us, and they perform extremely well. Yes, we see and we do. We see our project work increasing in our power delivery group, let me step back and say that.

Good. Super. Thank you.

Our next question comes from the line of Adam with Thompson Davis. Adam, your line is open.

Hi. Good morning guys. Congrats on a solid quarter. You made a comment about $14 billion of industrial projects, can you just flesh that out a little bit?

It’s just a funnel of the projects that we have identified that are kind of fit in our wheelhouse that we are going to – we will pursue a portion of those. We definitely aren’t going to pursue $14 billion worth of work, but it is an addressable market for us. And a lot of that work, I think I noted in my comments, about 80% of that work is in our engineering and industrial construction, and they are really right in our strengths. The size and the type of project work that we have an expertise in, which is really what we are focusing on and trying to make sure that we improve our margins and continue to see margin expansion.

And are those 2024 construction starts?

Some of they will carry into 20 – they will be 2024 for sure, and they will carry into 2025. When the – if you get into the EPC, then you have a period of four months to six months, eight months where your clients doing design or we are doing design on the projects before they move to the field. Some of these projects are projects that will go directly to the field.

Okay. And I hate to ask this because we have talked about this extensively. But I still don’t quite know what the message is on solar. Like I think that’s still a growth market for you guys next year, but I just kind of wanted to make sure.

Most definitely a growth market, but when you get to $1 billion, $1.5 billion in size, you are not going to continue to grow at 100% a year. So, we continue a disciplined approach to hiring and developing our teams and the work that we take on. And so we are still expecting 20%, 30% to 40% growth in that business in the next year.

Okay. Perfect. Thank you, guys.

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

Yes. Great. On the utilities business, I guess the question in thinking about ‘24, I mean if the productivity issues and challenges in PLH sort of cycle out this year, you have got the restructuring pricing terms on contracts starting to take hold in ‘24. Why wouldn’t we see sort of a margin range towards the upper end of your target next year, if you are also getting the benefits of sort of more project work and power delivery? Just trying to kind of bridge the gap, why we wouldn’t see a significant increase in margin in utilities? Thanks.

That’s exactly what you are going to expect, and that’s where we are trending to.

Okay. The vast utilities see stronger and will be a bigger overhang to that [ph]?

Yes. We do expect that in ‘24.

Okay. And then, Tom, I mean just – sorry if you covered it, but what’s the outlook for the pipeline business next year? I mean it sounds like it’s come in a lot better than you had expected in ‘23.

They have a lot of opportunities on smaller projects. And what I mean by smaller is, their projects are less than $100 million. They are $50 million, $60 million, $30 million projects. As long as we win our share of that work, it’s – execute on it, which we have been able to do this year. Then they will be okay. It’s just not going to be – it’s still not a great market for pipeline and it’s not going to be, I don’t think for the next 2 years minimum. But our guys has right-sized their businesses and they are performing on the work that they have won. They just got to continue to do that.

Got it. And Tom, just back on utilities, the comment about just the talent acquisition, obviously, a pretty competitive market right now. Maybe you can talk about the things you are doing to acquire that talent, should we think it’s somewhat of an inhibitor to your growth next year in that business? Just kind of want to put that in context.

It’s not an inhibitor as long as we are successful. I mean we are not – it’s just not about – it’s not about necessarily about just being the highest paying contractor out there because we are not going to be. It’s the total package. It’s compensation. It’s benefits, It’s career development. It is – well then focusing on the retention of the people that you have, what we are really focused on doing is providing equity in the company and opportunities to buy equity in the company. It’s all of those things. And I think what we are starting to see is success breeds success and people will like working for companies that have good cultures that care about their people, that help develop them and lay out career paths and pay and have competitive benefits and they are winning work and performing well on the projects. And I think that’s where we are starting to see. We saw that in our industrial group over the last couple of years as they have improved their performance and their margins, getting people a lot easier and retaining them as much easier now. And we are seeing that with power deliveries. We brought in this leadership talent that people are excited about being part of that business, and they want to see where these guys can take it. And I think – so all these other things combined, I think will help us. But it doesn’t take away from the fact that it’s a tough market. Us and our competitors are always after good talent.

Understood. Thank you.

Our final question comes from the line of Julio Romero with Sidoti & Company. Your line is open.

Hey. Good morning. How much were renewable sales in the quarter? And what do you guys expect for the fourth quarter?

Let’s see. Renewables sales in the quarter were about $325 million. For the fourth quarter, it could be as much as – yes, for the fourth quarter it’s probably going to be – if they close everything that they are targeting, it could be over $0.5 billion, maybe even as much as $600 million.

Okay. Great. And then, hey Tom, you listed a few challenges within the renewables area, but you also talked about how you are well positioned, aligned yourself with customers to kind of be more resilient going forward. Maybe looking beyond 2024, what’s the biggest potential concern that you are just keeping your eye on out of the factors that you mentioned?

Anything that affects supply chain, I mean I mentioned in my comments earlier that transmission, anything that’s associated with transmission interconnects what are going to be the impacts of what’s going on in the Ukraine because that has definitely impacted the supply of transformers and some of that gear breakers and other components, it’s how long is that going to last. I know some U.S. manufacturing is picking up, and I think we are finding other sources and we are actually pre-buying trying to get ahead of that. But if supply of transformers and breakers goes to 100 weeks, that pushes jobs unless the clients have already secured supply. So, that definitely is a concern in like ‘24 and ‘25, if that’s not solved for at least actions are taken to deal with it.

Okay. That’s helpful there. And then just the customers, you mentioned you aligned yourself with on the renewable side and the work you are going after that on a relative basis, that seems less affected by higher interest rates, at least for the moment.

Yes. We are not hearing our customers talk about that at all.

Okay. Very good. Thanks very much.

We would like to take another question from Lee with CJS Securities. Lee, your line is open.

Hey. Just following up on Adam’s question and maybe piggybacking on Julio. Tom, I think you mentioned 20% to 30% to 40% growth in solar next year. Can you just give us a baseline for 2023 that we are working off of in that business?

1.35.

13.5 is where we expect to end the year.

Thanks.

I would now like to turn the call back over to Tom McCormick.

Thank you for your questions and for participating in the call this morning. We have reached some important milestones as a company so far this year and are optimistic about the future. But we know there is still work to be done. We have to continuously build on our strong company culture to attract top talent, improve productivity in our operations and provide quality service to our customers in order to become the company we believe we can be. I am excited to be in the position to help lead a great team towards these goals. Thank you again for your time and interest in Primoris.

Ladies and gentlemen, that ends today’s conference. You may now disconnect. Thank you for your time.