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. 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 is 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 in negotiating increases to MSA rates that are not in line with the current market. In fact, we submitted several high-profile power delivery MSA renewals during the quarter that will help cement our future backlog in updated market rates. These and other successful customer engagements resulted in our booking more than $650 million in new business in this segment during the quarter. We also made some modifications to our organizational structure in this segment during the quarter that we believe will allow us to better serve the needs of our customers and operate more efficiently. First, we brought in additional talent that will strengthen our leadership teams, particularly in power delivery. Second, we made changes to align our leadership to focus on our commercial efforts by product and service lines rather than by region in order to better target the breadth of our customers' needs across multiple geographies. Finally, we are focusing increased attention on bidding and winning more project work in our power delivery business. Primoris has made substantial progress over the years in establishing strong long-term relationships with customers and increasing our mix of revenue that comes from MSAs across all of our businesses. This will remain a focus for us going forward as we believe it drives stability and predictability of our revenue in this segment. However, we believe that our current volume of major projects, including transmission and substation work, which represent less than 10% of current backlog, can be further optimized. We have both the necessary expertise and market opportunity to improve our balance of project and MSA work, specifically in our power delivery operations. A greater balance between project and MSA work will deepen our client relationships by broadening our service offerings in a growing market and should enable us to expand segment margins. Turning to the Energy segment, we saw a similar seasonal outperformance driven by strong top line and margin growth from our renewables, industrial, and pipeline services businesses compared to the first quarter of 2022. In renewables, we had another quarter of solid execution from our solar business, which is experiencing a very robust project pipeline. We continue to strive to operate in a manner that will allow us to achieve market outperformance in an industry that continues to experience some bumps in the road from both macro and political perspectives. While overall, a driver of anticipated growth in the coming years, the delay on the inflation reduction guidance is still causing some hesitation by our customers in the near term until full guidance is issued. However, given our solid backlog of projects, we do not expect this delayed guidance to have a material impact on our ability to meet our performance objectives this year. We anticipate the IRA guidance will be issued to the market in the coming quarters and will reaffirm the expected opportunities and increased backlog from the pipeline of projects we have in the quarters ahead. Additionally, while there has been improvement in recent months, the market is still experiencing some module tariff delays in early to mid-2023. However, I remain disciplined in the partners I choose to work with, and who have worked hard to secure module supply. We do not currently see significant risk to our projects. Furthermore, we expect that the supply chain for modules will continue to improve through the course of the year. Finally, due to the rapid growth of the market, there has been price movement on other materials used in the construction of projects. We have been able to mitigate these inflationary impacts by pre-buying equipment and materials when necessary, locking up manufacturing allocations, self-performing the work for our clients, and lowering our pricing risk due to market changes prior to executing a contract. Renewables opportunities outside of solar also continue to present themselves in the markets we serve as our economy looks to transition to more diverse and less carbon-intensive energy sources. During the quarter, we booked the first of what we believe will be many opportunities for carbon capture utilization and storage pipeline projects, or CCUS. These pipelines will fit well with our engineering and construction capabilities and can play a key part in a lower carbon future. In addition to CCUS opportunities, we are also pursuing a sales funnel of more than 50 hydrogen, biomass, and renewable natural gas projects that could lead to hundreds of millions of dollars more in revenue over the next several years. Our traditional energy portfolio of services is also off to a strong start in 2023. We are beginning to see green shoots supported by infrastructure investment legislation and a growing LNG export market in the Gulf Coast that is driving increased bidding activity. While it remains only 10% of our overall revenue, we believe we've seen the trough in our pipeline services. In fact, we are seeing a steady growth in bid volumes for small and medium regional projects and have returned the business to positive margins following a difficult environment in 2022. The market remains competitive and permitting challenges persist, but we are optimistic about further improvement in revenue and margins on the horizon. With that, I'll turn it over to Ken for more on our financial results.

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 the 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 one-third of our revenue during the quarter, and improved margins in our industrial and pipeline businesses. Similar to our Utility segment, we expect to see revenue and gross profit gradually increase in the coming quarters as we continue to grow our renewables business and make progress on our sizable backlog in the entire segment. Take a look at our SG&A expenses in the first quarter were $78 million, an increase of almost $23 million over the prior year but in line with our expectations. The increase in SG&A is primarily due to the additional PLH SG&A and incremental costs to support our strong organic growth. However, as a percentage of revenue, SG&A declined to 6.2% from 7.1% in the prior year due to stronger revenue growth, demonstrating improved operating leverage in the quarter. We expect SG&A for the full year to continue to trend in the low 6% range. Net interest expense in the first quarter was $18.5 million compared to $2.9 million in the prior year. The increase was due to higher average debt balances and higher average interest rates. We continue to anticipate our full year interest expense to range between $73 million and $77 million. Our effective tax rate was 28% for the quarter, and we expect this rate to be consistent for the full year depending on the states in which we work and on nondeductible components of per diem expenses. Earnings for the quarter were improved across the board from the prior year. EPS increased by $0.05 per share, and adjusted EPS increased by $0.17 per share. More importantly, net income increased to $1.3 million, an increase of $3 million from the prior year, and adjusted EBITDA increased to $52.8 million, an increase of over $30 million or 133.5% from the prior year. Turning next to cash flow, Q1 saw cash used in operations of $115.3 million. The primary driver was higher accounts receivables, unbilled revenue, and retention as a result of significant revenue growth. In addition, Utilities customers generally have longer payment terms and require greater documentation to support our invoices, which also contributes to higher accounts receivable and higher contract assets. We are taking steps to improve both our billing and collections in order to maximize our ability to convert revenue to cash. We are also working to reduce retention requirements, improve payment terms, or include more upfront cash payments for mobilization and demobilization in many of our new contracts. We are confident that as we make progress on these initiatives over the next couple of years, we will see a more balanced working capital position as well as improved cash flow. We ended the quarter with $94.8 million of cash and net debt of approximately $1 billion. Borrowing capacity under our revolver was $177.7 million providing the total available liquidity of $272.5 million at quarter end. Total backlog at the end of the quarter was a little under $5.6 billion compared to $4 billion in the prior year, an increase of 38%, resulting in another record backlog. Fixed backlog increased to $3.5 billion, up over $1.1 billion or 47% primarily due to strength in our Energy segment. MSA backlog was up 25% or $408 million to a little over $2 billion, driven by organic growth in our communications and power delivery businesses along with acquisitions. We expect 100% of our Utilities backlog and 60% of our Energy backlog to convert into revenue over the next 4 quarters. And finally, turning to our full year earnings guidance. We are reiterating our full year EPS guidance of $2.10 to $2.30 per share, adjusted EPS guidance of $2.50 to $2.70 per share, and adjusted EBITDA guidance of $350 million to $370 million for the full year 2023. While Q1 exceeded our expectations, a portion of it was driven by projects and revenue that we expected later in the year. But with this strong start to 2023, we are optimistic that we can move toward the higher end of our guidance ranges if our end markets continue this positive trend.

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, 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 on the 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 it 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 the 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.

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 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 75-25 or 80-20, something a little bit more favorable. Right now, we're about a 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 at slightly higher margins that will drive your margins up. 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 $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.

Can you provide more detail on the segments? Since we've consolidated them, it's difficult to determine any significant factors within the different businesses that affect margins. Are there any notable positive or negative influences that could continue to impact margins over the next few 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're some improvements that will be made in power delivery, but communications and gas are continuing to perform well. I think some of the power delivery 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. Regarding the comments about the power delivery business development efforts, some of that seems new. I want to make sure I understand what you are trying to achieve there and where the margin enhancement comes from. Additionally, it would be interesting to hear your thoughts on the strength in the legacy power delivery operation that you mentioned in the first quarter.

I believe the improvement will come from taking on more project work, increasing that share compared to MSA, which we discussed earlier. Our power delivery group has a few strong areas, but there are regions where improvement is needed. As indicated in our announcement, we have added some management to strengthen that team, and they are now addressing the areas that require assistance. We anticipate seeing benefits from these new individuals joining the company. As they renew these MSAs and take on more project work, it will help them enhance their margins, and we expect 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 firming up? I just wanted to understand kind of the background there.

The opportunities are there. It's 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. We've had some, but not enough to really take on just the 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 one-third 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. The 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 lastly, regarding the delay on the IRA guidance, which is still causing some hesitation in the solar sector, could you discuss how you anticipate orders will trend once the IRA guidance is issued? Also, could you provide insight into the potential pent-up demand that may exist?

Yes. While I cannot specify the potential demand, we anticipate an acceleration of opportunities. Once clients have a clear understanding of their expectations and requirements, and know which contractors can fulfill those needs, we expect the momentum to increase.

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. I can't provide the exact timing, but we expect EBITDA to gradually increase as we transition from Q2 to Q3, which is typical. Depending on when projects start, particularly some solar projects, the decline in Q4 might not be as significant as in previous years. Overall, we anticipate a performance that is quite similar to prior years and a strong overall outcome.

Okay. Helpful. And then second question would be under your Utility MSAs. I guess we're in 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 expectation is that our clients have a lot of work to be done by the end of the year.

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 still get you there out of this year?

Yes. Tom and I were considering that question. What will push us to the higher end of our range in Utilities boils down to two factors. Firstly, our ongoing contract negotiations are definitely a key aspect. Secondly, as Tom mentioned, it's about our mix of MSA versus project work. Currently, it's below our target level. As this mix improves from around 10% to our goal of up to 45%, we expect that to enhance our margins, moving them closer to the upper end of our range.

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 they're a 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 some contract work for a number of the contractors, and it's created several opportunities for us. 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 in 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. 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.