Ladies and gentlemen, thank you for standing by. At this time, I would like to welcome everyone to Primoris Services Corporation First Quarter 2024 Earnings Conference Call and Webcast. [Operator Instructions] I would now like to turn the conference over to Blake Holcomb, Vice President of Investor Relations. Please go ahead.

Good morning, and welcome to the Primoris First Quarter 2024 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, May 9, 2024. 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 Investors Section of our website in our first quarter 2024 earnings press release, which was issued yesterday. I would now like to turn the call over to Tom McCormick.

Thank you, Blake. Good morning, and thank you for joining us today to discuss our first quarter 2024 financial and operational results. Primoris had a solid start to the year, delivering improved revenue and margins compared to the prior year. Our teams across the organization are engaged and focused on executing our strategy to improve profitability and cash flow while leading with safe and productive performance. We continue to see momentum driving increased investment in infrastructure solutions in North America in 3 primary areas that are having a positive impact on our business: the energy transition, growing electricity demand and grid modernization, and the increase in facility construction to support a shift in the supply chain. The transition to lower carbon emitting sources of energy is driving increased adoption of solar power generation as well as natural gas generation to replace retiring coal plants and help bridge the energy transition. There's also a growing demand for electricity that is being driven by new facility construction, including data centers and chip manufacturing, which are supporting emerging technologies or adding critical component production capacity closer to the U.S. Many of these new sources of generation will need additional transmission lines and substations to connect them to a grid that is already in need of modernization in order to maintain reliability and support higher electrical demand. We believe that these themes are interconnected and will require sustained investment for an extended period of time, and we are well positioned to capitalize on these themes in the coming years. Now let's look at our performance for the quarter by segment. Starting with the Utilities segment, we had a couple of factors that led to lower revenue versus the prior year. First, we experienced more seasonal delays in the first quarter of 2024 driven by…

Thanks, Tom, and good morning, everyone. Our Q1 revenue was $1.4 billion, an increase of $156 million or 12.4% from the prior year, primarily driven by strong growth in our Energy segment. The Energy segment was up over $245 million or 33.4% from the prior year, driven by strong growth in solar and industrial construction as well as some work that was pulled forward from Q2 and Q3. The Utilities segment was down a little over $48 million from the prior year due to a decrease in project work and a slightly slower start to the year in communications, partially offset by increased MSA revenue. The majority of the decline in project work was due to the completion of a large substation project during 2023. We expect to see some choppiness in project revenue on a quarterly basis as we continue to grow toward our preferred mix of project work in the segment. I also want to point out that we made a change in how we report segment revenue. Historically, we've reported segment revenue net of the intersegment eliminations since it wasn't material to our total revenue. However, starting this quarter, we are showing gross revenue for each segment and then separately showing the intersegment revenue deduction. We believe this more accurately reports the gross revenue and revenue growth of each segment and better illustrates the growing benefit of cross-selling services between our segments. An example of this is our power delivery group building substations and transmission lines for our renewable customers. Gross profit for the quarter was approximately $133 million, an increase of $34 million from the prior year, primarily due to higher revenue and improved revenue mix. Gross margins were 9.4% for the quarter compared to 7.9% in the prior year. Looking further at our segments. In…

Thank you, Ken. Before we open up the call for questions, I want to highlight key points of the strategy we laid out at our recent Investor Day that will drive our decision-making for the next 3 years. Our objective is to grow gross profit at a 9% to 12% annual rate through 2026 and improve operating cash flow to 4% to 5% of revenue. We will accomplish this by investing in our renewables and power delivery growth engines while sustaining our foundational businesses performance through consistent execution, focused capital allocation, and purposeful customer growth. This begins with prioritizing profitable growth in the right markets with the right customers. We will continue to do what we say we're going to do for our customers, employees, and shareholders with the goal of deploying resources to the highest returns in our portfolio. We may not be the largest service provider in all of our markets, but our aim is to be the best allocators of capital in order to generate the best returns. We are still in the initial stages of driving operational improvements to meet our longer-term margin and cash flow goals, but we are starting to see the results of these initiatives with a strong start to 2024. We believe we have the right teams in place to continue marching toward these goals and look forward to further safe, consistent, and high-quality execution by our employees for the benefit of our customers and shareholders. We will now open up the call for your questions.

[Operator Instructions] Your first question comes from the line of Lee Jagoda with CJS Securities.

So Tom, earlier in the call, and I think -- and certainly at the Analyst Day, you talked about that $200 million to $250 million in business that would be a headwind to growth in the Energy segment. It doesn't sound like any of that occurred in Q1. I guess a couple of questions on it. One, do we expect it to occur all this year? And then any sense of the timing of that and the margin structure of that revenue would be helpful.

Yes. Lee, we're working on about 3 of those businesses. Roughly $90 million of that $200 million should be completely wound down or very close to it by the end of this year. The balance of it will probably take us into 2025.

Okay. And then in terms of interest expense, Ken, it looks like your guidance is above the run rate that you had in Q1, and even the sequential decline from Q4 to Q1 was more than we were expecting despite the debt kind of being flat, what are the moving parts there? And why should it be going back up through the balance of the year?

Yes, the main parts, Lee, are going to be working capital, especially during Q2 and Q3 are seasonal peaks and whether or not we need to draw on the revolver in order to work through that. In our original forecast, we had planned to draw on the revolver even as early as Q1. Obviously, cash flows were better than we expected. We didn't need to, so that's the reason it came in below. So if we're able to continue at the rate we are, our interest expense may trend below what we had originally guided to.

And just one more for me and I'll hop back in. The CapEx guidance, is that a gross number or a net number? And to the extent that is a gross number, how should we think about the equipment sales to offset that during the year?

It's a gross number like it always is. And we're expecting sales to be much less than they have been in the past, probably somewhere in the $30 million to $35 million range for the year, maybe as high as $40 million but nowhere near the $60 million-plus that we had last year.

Next question comes from the line of Steven Fisher with UBS.

So obviously, a pretty robust profit quarter in the Energy segment. You mentioned kind of a mix of renewables in Canada and western U.S. projects. How kind of one-off was this or how sustainable might that be? And related to this, I know you said there's potential for the upper end of the range for the year if you see positive momentum. Where do you think you need to see that momentum continue? I thought you were pretty well booked on solar, and that maybe it's just more execution that you needed to see more comfort in for the rest of the year to raise. But is it more bookings that you need and where might you need those bookings?

Steve, I don't think -- we're not worried about bookings. I think when you -- so I'll answer your last question first. It is, can we continue to perform? It's just consistency and performing, continuing to do what we say we're going to do across the board and across all of our businesses. I think Canada is very sustainable with where they are right now. I think the western U.S. has certainly -- they've got a nice workload, a nice backlog of work that's going to carry them through 2025, so I'm not worried about that. And Renewables continues to grow as it has been, so it's going to be that 20% to 30%, maybe a little bit more depending on what their other business lines can do. So it's in getting the other businesses to continue to improve their performance and execution to bring our margins up to the targets that we set during that meeting.

Okay. One of the things that we've heard a bunch about is the shift in electric distribution spending to transmission. What are you seeing in your customer base and kind of regional territories that you have exposure to? And what are your customers telling you about the second half of the year?

Well, we're still in the first half right now, but what we're seeing is it depends on the client and the part of the country that you're in. We have some clients, the majority of their work is going to be distribution work. They have some new transmission going in, but they obviously have to get through the permitting and everything else. We have other clients that they've just recently announced their energy demands having grown beyond what they had forecasted as recent as 3 months ago. And so there's going to be quite a bit of transmission and also along with that more distribution. So it just depends on what part of the country and what client. We see a lot of opportunities in that for our power delivery group in both Transmission and Distribution, and it is a little bit different for each client.

Next question comes from the line of Jerry Revich with Goldman Sachs.

I'm wondering if you could just talk to us about the performance of the solar business in the quarter. And can you update us on how many crews you folks are running now and the crew growth trajectory versus the last update we had?

So I'll start with your last question, too, Jerry. We have -- right now, we have 16 project teams. We have 50% of the other 2 project teams that we will have in place so we'll have a total of 18. Our target is to get there by the end of September. And as far as the performance of the Renewables group, they continue to perform extremely well. We're doing a lot of work for clients now. We've got some new awards that we'll probably announce here in the second quarter. And a lot of that is just a function of our clients' confidence in our performance and execution.

And what was the top line performance for solar and renewables in the quarter?

A little over $400 million.

Okay. And then really strong start to the year from a margin standpoint. As we think about the margin cadence into 2Q, it's usually a quarter of nice step up, but across the portfolio, anything we should keep in mind versus a pretty significant margin pickup that we normally see seasonally based on what you've seen out of 2Q so far?

No, I don't. I think you're going to see continued improvement in our Utilities over the course of the year towards the targets that we've set and then carrying on into 2025. I think Renewables is going to continue to perform as they have, and we should see more of that in the industrial part of our work also as they pick up more work and move to the field. We're seeing some opportunities in Pipeline, too, that hopefully will become -- be realized here in the coming months. And as you know, those jobs move to the field pretty quick. So we've been very careful about the type of work we bid in that business to make sure we're doing the right work, taking on the right work for the right clients. And so if that's realized too, then we should see some benefit there as well.

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

Great start to the year. I guess, Tom or Ken, the Energy segment revenue, I guess overall growth a lot better than we thought just to kick the year off. When you look at the sequencing of projects in the backlog today and what you're likely to kind of pick up going forward, should this still be the lowest revenue quarter of the year and we can still expect to see a buildup from here? Did you pull in more work than you would have thought?

It's a little bit of both. We did pull in more work than we thought. But yes, this should be -- for the Energy segment should be the lowest quarter of the year.

Okay. And then I guess back to Utilities, it sounds like maybe a little slower start in the communications side. What's your expectations for that business as we progress through the rest of the year? Should we see that sort of inflect higher from here?

No, I don't think so. I think that we're seeing, with the hyperscaling and the BEAD, the Broadband Equity, Access, and Deployment money that's coming out there, we've got a lot of clients out there that are really wanting to move forward with some projects. So I think we're probably going to see an uptick in the second and third quarters. We may see them slow their spend down at the end of the year, which is typical of what we've seen in the last couple of years in communications, but I think it's going to be a good year for our communications group.

Okay. And just lastly, Tom, I couldn't help but you did mention the Pipeline business and maybe a little more optimism there. Maybe you could just share what exactly you're starting to see in that side of the business?

It's more bid activity. So you look at your win rates, your historical win rates and we should win our share of that work. We have some projects that we've competitively bid that we're short-listed on now, they haven't been awarded. We don't know if we're going to be awarded those projects. But just the fact that, that activity is going on, and it's the type of work in which we have an expertise and we feel like we can be competitive, it's just positive. It's not going to drive me to increase their forecast for the years just because it's still going to be a down year for Pipeline as it has been in the last couple of years.

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

Yes. This is Alex on for Julio. First question on the Utilities segment. What are the biggest levers to get you to the high and low end of the Utilities gross margin range? Is it a renegotiation of PLH contracts or increased mix of power delivery? Just appreciate your help thinking about it.

You pretty much -- we got some MSA contracts that we're in renewal right now that we had some recently, we renewed, it went into effect in April. We got some that we're negotiating now that we have go into effect sometime late -- mid- to late second quarter. The sooner that they go into effect, the better off it will be for that business. But it's also picking up more project work. We want to be in that 65%-35% range, MSA to project order or 60-40. And if we -- the more project work we can bid and win and execute successfully, it's just going to drive that number up.

I appreciate the context. And could you expand a bit on the higher industrial construction activity in the western U.S.? I think you mentioned it in the press release and earlier remarks, but just curious for a little bit more context.

A lot of it's just power generation work and it's -- or compressor stations that serve power generation facilities, and so one of them is a repowering project we actually have been pursuing for about -- almost as long as I've been with the company, 7 or 8 years. And it died, it didn't get permitted, and it came back to life this year, and we were able to negotiate and win that work with the client. And so now it's moving forward. The other one is a project out West as well, and we're putting in new turbines out there for a client. And it's just again, that energy demand out there is not going away and the energy transition from fossil fuels to renewables isn't going to happen quite as fast. So they still have a power demand out there that they got to feed.

Appreciate that. And last question from us. On capital allocation, could you just speak to the M&A pipeline lately and whether valuations are any closer to meeting your selection criteria?

Yes. I mean, look, we -- as we've continually said, we continue to see a lot of M&A. And for us, it's really not a valuation issue as much as it is just finding the right opportunities to fit what we're looking for or that are the quality that we're looking for. So we continue to look and pursue various acquisitions. We're in -- we're not in serious conversations with anyone right now. We're continuing to evaluate, but it's not a valuation issue. It's purely a fit and opportunity issue.

And we're seeing more activity. It's just -- it's going to have to be the right opportunity for us.

[Operator Instructions] Your last question comes from the line of Adam Thalhimer with Thompson, Davis.

Great quarter. Tom, you mentioned a couple of solar jobs that were particularly large. Why is that, that you're bidding, I think?

Well, one, because we have the capability to do it, and we have the expertise to do it, and particularly large, what's large, we're not chasing billion-dollar projects. But when I say large, these are in the $350 million to $400 million, $420 million range with clients that we know, that we have a good relationship with. We've been involved in the work since site selection activities took place and we're very familiar with the site, very familiar with the area, very familiar with what the craft needs are. And that just -- it just fits into our wheelhouse.

Great. Power for data centers is a hot topic. Is that an opportunity for you guys?

It is, it is. We're doing a little work for some of them now. Our -- one of our objectives and one of our initiatives is to grow that business and grow in that market.

I know you do work on gas power plants in the Southwest. Do you do anything outside of that region?

We do -- yes, West, we have done some power generation in the East in some simple cycle facilities. We have the expertise to do it, and we're looking into that market. Again, it's -- we want to make sure that we stay within the confines of our expertise and our capabilities so that we're successful. But yes, we're looking at work in the East as well, in the Southeast.

And then lastly, I don't know how much you want to say it on the call, but you mentioned dispositions again and you talked about that at the Analyst Day, too. Just curious, maybe just like timing on that.

Really, we don't know the timing. The main thing we've -- we'll be focusing on this year is those 2 or 3 small businesses that we're winding down. And as Tom alluded to, that's about collectively $90 million of revenue across all 3. That shows how small they are.

$90 million of revenue. Okay, great.

There are no further questions at this time. Mr. Tom McCormick, I turn the call back over to you.

Thank you, ma'am. Thank you for your questions and interest in Primoris. I'll just close by recapping the key takeaways for the quarter. Our strong first quarter results have given us a solid foundation toward achieving our annual targets. Strong tailwinds driving increased investment in infrastructure solutions, particularly in power generation and grid modernization are expected to continue trending favorably based on leading market indicators and our ongoing conversations with clients. And finally, we are focused on allocating our resources to the businesses in our portfolio that will generate the best returns on capital and drive improved profitability and cash flow. Thank you, and we look forward to updating you next quarter.

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