Primoris Services Corp (PRIM) 2009 Q1 法說會逐字稿

Good day, everyone, and welcome to the Primoris Corporation 2009 first-quarter financial results conference call. At this time, I would like to inform you that this conference is being recorded and that all participants are currently in a listen-only mode. I would now turn the conference over to Devin Sullivan of the Equity Group. Please go ahead, sir.

Thank you very much, operator, and good morning, everyone, and thank you for joining us. Our speakers today will be Brian Pratt, (technical difficulty); Peter Moerbeek, Executive Vice President and Chief Financial Officer.

I'd like to remind everyone that statements made during today's call may contain certain forward-looking statements (technical difficulty) or to the Company's future performance. Words such as estimated, believes, expects, projects and future or similar expressions are intended to identify forward-looking statements. Forward-looking statements inherently involve risks and uncertainties, including, without limitation, those described in this morning's press release and those detailed in the risk factors section and other portions of Primoris' annual report on Form 10-K for the year ended December 31, 2008 and other filings with the Securities and Exchange Commission, including the Company's Form 10-Q, filed on or about May 13, 2009.

Primoris does not undertake any obligation to publicly update or revise any forward-looking statements (technical difficulty) except as may be required under applicable (technical difficulty).

I would like to turn the call over to Brian Pratt. Please go ahead, Brian.

Thank you, Devin, and good morning to everyone, and thank you for joining us. We are pleased with the results for the first quarter of 2009 as we were able to remain reasonably profitable in a challenging and tumultuous environment. While revenues were lower year-to-year, totaling $128 million for Q1 of '09 compared to $169 million for Q1 of '08, our work mix, our continued emphasis on pursuing more profitable projects, coupled with operational efficiencies, resulted in improved margins and comparable pretax profitability and pro forma income.

Gross margin as a percentage of revenues rose to 11.1% from 9.6% in Q1 of '08. This is due to numerous factors. The most significant is the growth in the proportionate share of work in market segments that are traditionally more lucrative for us. This greater profitability is due to the fact that these segments allow us to better leverage our customer relationships, internally-owned equipment fleet and very seasoned and loyal workforce, among other factors. This is a trend we see continuing as the market segments that don't allow us greater use of these assets seem to be the segments with diminished availability of work and more difficult competitive issues.

Our profit before tax was a lower $9.3 million for Quarter 1 of '09 compared to $10 million for Quarter 1 of '08, but increased as a portion of the revenue from 5.9% to 7.2%. We generated positive cash flow at March of '09, and our balance sheet at this time reflected cash investments of $84.3 million, which is roughly comparable to our cash position at year-end '08.

Geographically, where we generated our revenues changed somewhat from '08, as we saw an increase of contribution from our operations outside of the US. These offices contributed almost 10% of our revenues in Quarter 1 of '09 against less than 3% of the same quarter in the year prior.

Work in our Calgary office, which centers on large fired heaters for the refinery industry, was largely produced for Asian customers and totaled around $7.5 million of revenues. Work on our Ecuadorian subsidiary totaled $5.2 million -- that's $5.2 million in revenues, and consisted of several oil production development projects that remain ongoing at this time.

In typifying our current and near-term future work mix -- I am speaking here only of content, not quantity -- it appears to be very similar to what we encountered in Quarter 1 of this year. But as I am sure you are hearing on most of these calls, there is a large degree of uncertainty among many of our customers as to the availability of funding of their projects. This is obviated a bit by the fact that a large portion of our work comes from well-capitalized utilities, which at least at this point don't appear to be suffering lack of funding and are also committed to facility expansions and regulatory mandated expenditures.

We continue to anticipate revenues for '09 will be somewhat lower than '08 due to the effects the continued strains in the economy and difficult credit markets are having on some of our customers. However, we remain optimistic about our prospects for this year and the next several, based on several factors. Among these factors, that we enjoy a strong level of core business, servicing very stable clients, and we feel we will see ample opportunities in backbone upgrades, expansions, power plants with both traditional and renewable applications, continued work from our clients responding to environmental and regulatory agencies, and the exploitation of new technologies and markets in our engineering business. After that run-on sentence, now you know why I chose to be a contractor instead of an English teacher.

Our strong balance sheet will allow us to be selective in our work acquisition, enabling us to focus on the more profitable opportunities, particularly in an environment where a good number of our clients seek well-capitalized contractors precisely because of these difficult times.

The same balance sheet will allow us to pursue appropriate acquisitions. With what we feel is a very undervalued currency, our script, acquisitions are more difficult. This has been exacerbated by the fact that private targets were slow to understand the new value paradigm that has been imposed by the public market. That being said, we are optimistic that attractive opportunities are out there, and we are working diligently to seek them out. As has nearly always been the case in our industry, uncertain times like these create great opportunity.

Our bidding environment remains competitive in some areas, but we are experiencing no shortage of availability of quality opportunities in our dominant markets. These opportunities are largely in our sweet spot and play to our strengths -- in company-owned equipment, client and agency relationships and an incredible work force we have nurtured for decades.

A good example of these projects is one we recently announced with a contract value of approximately $25 million to replace existing copper natural gas services for a large California utility. Incidentally, we enjoy a 60-year relationship with this utility. Because of this contract -- it is part of an existing alliance agreement that is several years old, it is illustrative of the duration, depth and consistency of our client relationships and what they can mean in times like these.

As of Q1, we are supported by $352 million of backlog, of which we would expect 80%, or $280 million, will translate to revenues in 2009. Today, we have seen virtually no cancellation of backlog work. We are also experiencing an increase in short-term, short-notice work that never goes to our backlog. The backlog we have is very good quality. In near-term possible additions to the backlog, we are seeing a good flow of opportunities in our traditional markets and very significant opportunities in renewable energy projects, specifically wind, solar, bio and waste heat.

We believe our opportunity in renewables will be enhanced by the administration's adoption of the American Recovery and Reinvestment Act and the American Clean Energy and Security Act and the California public utilities mandate for more generation of power from renewable resources. This is particularly important to us as while the state demands a large portion of our power have come from more intermittent renewable resources, there will be a need for new gas-fired peaker plants to aid in the mitigation of this intermittency. These peakers are projects we have a strong resume in constructing.

Also, the locations of these new power cells will require enhanced and expansion of grid to deliver this power. Much of this expansion will come in areas where either environmental or aesthetic demands will require the new transmission lines be buried, a process in which we are very skilled.

All in all, I am confident of our ability to continue to build on our track record of both organic and acquisitive measured growth. Today's markets are significantly more opaque than in the past, but I feel we are performing well and I'm optimistic we can deliver good value to our clients and specifically our shareholders.

Before we open for our questions, I would like to turn the discussion over to Pete, who will take you through the first-quarter numbers in a bit more detail. Pete?

Thank you, Brian, and thanks to each of you for taking time to join us on this call. I plan to highlight some of the first-quarter results, starting with our revenue. As Brian said, our overall first-quarter 2009 revenues decreased 24% from the same quarter last year [to $169.4 million from $128.7 million] (sic -- see press release).

In our Construction Services segment, revenues were $110 million, a 24.9% decline in revenues from 2008, primarily due to a significant reduction for construction projects in the refining sector. This decline was offset by higher revenues this quarter in pipeline, cable and conduit projects, reflecting significant work we've done at the end of 2008 and early 2009.

Revenues for the Engineering segment declined by 18.5% to $18.7 million from $23 million, due primarily to the impact of our work on the Clean Energy Project. In the first quarter of 2008, we recognized significant revenues with significant activities, while during the first quarter of this year, our revenue has declined significantly, as we are now providing assistance during the startup phase of this project.

The overall decrease in revenues of $40.7 million obviously had an impact on our overall profitability. But at the margin level, that impact was partially offset by a significant increase in the gross margin as a percentage of revenues. On a Companywide basis, as Brian mentioned, gross margin as a percentage of revenues increased from 9.6% to 11.2%, with improvements in both of our reporting segments.

Overall gross margin in the Construction Services segment decreased by $1.8 million, or 12%, compared to the prior first-year quarter, but the margins rose to 11.8% compared to 10.1% of revenues for the year-ago quarter. The improved gross margin percentage was due primarily to a shift in business mix from traditionally lower-margin projects in the refining sector last year to higher-margin industrial projects in the petroleum and power sectors this quarter.

Similarly, the gross profit margin as a percentage of revenues increased in the Engineering segment to 9.1% this quarter from 6.2% for the same period in 2008. The improved gross margin percentage resulted in a total gross margin dollar increase for the segment to $1.7 million, a 20.6% increase over last year. As expected, in 2009, we saw a return to more historical margin levels.

Our total selling, general and administrative expenses showed a decrease in the quarter of $400,000 over the first quarter of 2008. The decrease is the result of reporting a net gain of $1 million on the sale of operating and construction equipment, as part of our ongoing fleet upgrade program to meet anticipated requirements of Californian environmental regulations. The gain was offset by an increase of $600,000 in increased expenses associated with being a public company since July 2008.

Net Other income for the quarter was $2.1 million, a net increase of $300,000, primarily due to increased earnings from our joint venture Otay Mesa project.

For the first quarter of 2009, income before taxes was $9.3 million, a $700,000 reduction from the prior quarter. But primarily due to an increase in gross margins, our pretax income was 7.2% of revenue compared to 5.9% of revenue in the prior-year quarter.

Net income this quarter, when compared to pro forma net income in the prior-year quarter, was $5.6 million, a decrease of $400,000 from the pro forma net income in the prior-year quarter. To arrive at pro forma net income for the prior-year quarter, we used an effective tax rate of 39.8% compared to our actual current quarter effective tax rate of 39%. We are using a pro forma tax rate for 2008, but that assumes that we were taxed as a C Corporation. In the period prior to becoming a public company in July 2008, we were taxed as a Subchapter S Corporation under the IRS code, which meant that the shareholders, rather than the Corporation, were responsible for most of the tax liability. We believe that pro forma net income for periods prior to the July 2008 merger is a better indicator of performance for comparison purposes.

Now turning to our strong balance sheet and strong cash position, the following are some of our balance sheet highlights at the end of the first quarter of 2009. One, cash and cash equivalents and short-term investments were $84.3 million, a decrease of $3.8 million from December 31, 2008. Working capital was $56.8 million, an increase from $54.1 million at the end of last year. Major changes to working capital include a decrease of $6.6 million in accounts receivable, due in part to collections and lower billings in the first quarter; an increase of $3.8 million in inventory, reflecting primarily pipe inventory in transit to our Ecuadorian subsidiary; and a decrease in accounts payable of $7.9 million, due primarily to the timing of vendor payments on various projects in process and an overall decrease in our activity (inaudible).

Spending on property, plant and equipment this quarter amounted to $4.2 million, with $3 million of that amount obtained under capital lease obligations. The spending reflects purchases to upgrade our equipment to meet anticipated California environmental standards, even though some of these standards may be delayed somewhat. Finally, for the quarter, we generated $4.9 million in operating cash flow.

Before discussing backlog, I want to remind you that it is our policy that we do not provide earnings guidance. As we have discussed before, our backlog is not a complete indicator of our future revenues. In the first quarter, we continued the trend of recognizing between 50% and 60% of our revenues from our backlog. The remaining revenues are generated from master service agreements, cost-plus contracts, unit price and time and material agreements.

Our backlog at March 31 was $352.8 million compared to $374.7 million at year-end. Approximately $86 million of our first-quarter 2009 revenues were derived from our December 31 backlog, which means that we successfully increased our backlog during the quarter by approximately $64 million. As Brian mentioned, we expect that roughly 80% of our backlog, or $280 million, will be recognized as revenue during the remainder of this year.

Finally, we anticipate filing our first-quarter 2009 Form 10-Q this morning, and we also anticipate filing a Form S-8 to register our incentive plan shares within the next few days.

With that, let me return the call to the operator so that we can respond to any of your questions.

(Operator Instructions) Arnie Ursaner, CJS Securities.

Good morning. First question would be during the quarter, were there any share or warrant repurchases? I don't think you disclosed that in your press release.

Arnie, we have a 10b5-1 plan that has -- under which we have purchased warrants. I wanted to wait until the end of that plan to get to the exact number. I believe that -- you know what? Rather than guessing, let me figure out what that exact number was. It was not a significant number during the time that the 10b5 has been in place. It was only warrants. We've had no share repurchases.

Got it. And you mentioned you are going to register some of the shares, and your lockup does expire in July. One of the questions I had is can you comment on -- you've got several -- I know Brian is (inaudible) -- you've got several people that own sizable chunks of stock that are not active managers or employees of the Company. Is there an intent or plan when your lockup expires to try to improve the float in your stock, through either a formal registered offering or some other form of organized transaction?

We are going to do all we can, Arnie, to build the value of the stock. We are studying various ways to accomplish that. More float obviously would be helpful. I don't see the non-managers, any big sellers there. I wouldn't be surprised if some did, but none of them have expressed an interest to me to that effect. I actually bought a couple hundred thousand more shares a month or so ago. So most of the guys are just, as you know, strong believers in the Company.

We are exploring opportunities and various avenues to get greater float. That's all I can tell you at this point. We don't have a plan in place.

And on Otay Mesa, can you tell us or give us your best read of how much of the work is completed to date, and is it still on track to be completed for this year?

Yes. We are very well on track to complete this year. I am not sure of the approximate completion at this point. We do have some incentives in the project that if we achieve -- because we are really driving the labor component of the project -- if we achieve certain things, certain labor productivities and savings, we get an enhanced share of the profits. And we are excited about the prospects that might happen. But it will be completed -- I believe first fire is a scheduled for end of third, first of fourth quarter.

I'm not sure how many other analysts you may have on your call, so I'll ask one more and then jump back in queue. On the Praxair project, can you update us on the status of that, please?

It is going exceptionally well from the construction standpoint. It is a complex contractual relationship we have with the engineer and the owner. We had some hiccups along the way with that portion. Those were all resolved very favorably a week or so ago.

So the job is -- it is coming out of the ground exceptionally well. We are ahead of schedule. We are doing well on the budget. We think it is going to substantially grow. That was the genesis of the issues we had between the engineer and the owner. We could see that project grow by 25% or 30%. And it's in our contract that we get compensated for that. So it is going very well.

I'll jump back in queue, let some others, and if need be, jump back in later.

(Operator Instructions) [Matt Tucker], KeyBanc Capital Markets.

Good morning, gentlemen. I've got a few questions on behalf of Tahira Afzal. You mentioned again some opportunities on the renewable energy side. I was curious whether you worked on any renewable energy related projects during the first quarter, if you added any to your backlog, if you have any ongoing. And then maybe if you could talk about kind of -- just a little more specifics on the type and timing of the prospects you're looking at.

We've got a lot of people engaged in pursuing those projects, Matt. The problem -- you know, each segment of that business has its own share of issues. I don't want to bore you with all the details. Wind has been the predominant renewable today, other than what you read about in ethanol, which is just -- we just -- I don't think that's a market we want to pursue, never have.

Wind has been a little bit -- the market has been a little disrupted because of the inability for the developers to get financing. And quite honestly, they've struggled selling their tax credits, which is a lot of their impetus to start their projects. We are not pursuing heavily in wind, although we obliquely are pursuing it. Where we see -- and quite honestly, wind for contractors like us is not as attractive as solar.

Solar is an incredibly dynamic industry right now. There are so many technologies, from straight photovoltaic all the way through highly concentrated PV and thermal. And that has been kind of largely stymied to this point by a lot of new technologies which are unproved with the financing industry, which has their own problems, of course.

We have a lot -- a lot of proposals out. As a lot of you know, California is pretty much dominated by the labor unions. They pretty much decide whether a project is going to get built or not in the permitting phase. And in doing that, they have kind of forced a lot of the owners to come back and sign project labor agreements, which is good for us, because we work as a union contractor in California.

But we see a huge amount of projects out there. Some of them -- what portion I'm not certain -- it's going to be a fraction, obviously -- will get built. Some of them won't. But we are in the driver's seat on a lot of them because of our reputation in that industry. We built a lot of the thermal work which was done -- thermal solar work, which was done in prior years. The last good-sized thermal plant in California was built -- oh, gosh, it was in the mid-90s. But that industry is returning, and the utilities are absolutely crazy with desire to get these solar renewables online.

We are chasing hard waste heat, which if you look at the statistics, a large portion of new power in California on the boards is going to come from traditional generators that want to recapture their heat and use that to generate more power. Great market in California for that. It is a little bit fragmented, but a lot of these clients are people we work for on a regular basis. So we are in front of them all the time, and we are helping a lot of them explore various technologies to capture that waste heat.

Bio is a small business, but it is kind of attractive. We are looking at some rather unique processes and markets. The nice thing about California and places West, the price of electricity and the price of power is inordinately high, and that opens a lot of new technologies to the market where they otherwise wouldn't work in lower-cost areas.

So we don't -- I was just adding it up -- we've got about 3/4 of $1 billion of proposals out on renewables right this second, in various stages of award. A lot of them are hung on -- I won't say a lot of them -- a good portion are hung on financing. Some of them are going to get built.

So I guess is it fair to kind of summarize it to say that a lot of these projects are a little bit on hold, so to speak, maybe pending credit market improvement as a catalyst, or stimulus funds?

I don't know that a lot of them are on hold. They are slugging their way -- you know, California is a tenuous environment for permitting. And between slugging their way through getting the permits, a lot of the restrictions to these projects coming online, it is a rather overstressed power grid. And the power grid that runs east out of San Diego is running at about 115% capacity. I mean, you can see smoke coming off the lines, literally.

And of course matching up where you can get a permit to where you need the power, to getting a permit, to where you can tie into the power, to getting financing, to getting a PPA, or a Power Purchase Agreement from the California Utility, a lot of balls to keep in the air. And there is a lot of challenges with it.

But you know what? We are still popping out kids here in this state, and we still need electrons, and there's going to be a lot of power built. And the nice thing about renewables, as I mentioned in my presentation, was that when the sun goes down, guess what -- solar stops. And we continue to use power in California into the early evening until 7, 8 or 9 o'clock, and that means we need more peaker plants. That is really a big shortage in California.

And the traditional guys, like the Calpines, who aren't in the renewable business, have chosen to not be because they think the renewable business is going to enhance their peaker business. And so we've seen a lot of them -- we've got proposals out on a lot of peaker plants right now.

Okay, thanks. I was hoping you could comment briefly on how margins on work you got awarded during the first quarter or are bidding on currently, how that would compare to the margins you saw on work completed in the first quarter.

Geez, I guess, Matt, after my last answer, you threw the briefly in. You know, where our margins are generated is not homogenous. When we get pipeline jobs, underground jobs, large utility -- infrastructure, utility infrastructure jobs, power plants, we are able to use a lot of our Company fleet. And you know, when that big iron is parked, it costs you money. When it is working, it makes you a lot of money.

And that is where most of the impetus I see in our industry is, is in utilities and the underground. As I mentioned, a lot of these new power transmission lines are going to have to be buried. It's amazing to me that they have to go through the expense to do this. But the environmentalists and the people -- the city councils and mayors are not going to allow this stuff to be strung overhead. And that is a business we excel at. We are probably the big stick on the West Coast in burying these lines. There is a technology involved in them that has prevented them from being buried in a significant fashion until just recently. And we've done the preponderance of the work in that segment.

So I am very pleased with what we are bidding. Obviously, like the parking structure group, some of those groups, they are not big contributors to the bottom line, although they do add a lot to our critical mass. That business has slowed. We see some impetus from the Obama administration to aid that. A lot of the cities are getting funds to build parking structures and stuff like that, but we are not actively seeing huge flows of money into that segment.

So to sum it up, I am really pleased with what we are able to bid right now. There is good workflow. The estimators are all working all the hours they can on good, quality projects.

Okay, great. And then looking at the SG&A, I guess without the $1 million benefit that looked like it was maybe not really an ongoing thing with the fleet upgrade, I was wondering -- I guess SG&A would have been up a little bit year over year without that. I was wondering if going forward you have any levers you can pull to bring that down, if you are thinking about doing that.

Matt, part of the problem is that we incurred in the first quarter significant costs for consultants and auditing as we went through year-end for the first time as a public company. So some of the comparisons are a little difficult because first quarter in '08 we were not public. We are looking at rationalizing some of the expenses and looking where it makes sense to see what we can do. The numbers are certainly tracking kind of where we were in Q4 of '09 also.

Thanks. I just have one more question.

I would like to add to that answer just a tiny bit, Matt. You know, the nice thing about our Company is we do have a lot of moving parts. And every year, we kind of start with a clean piece of paper and say, who do we need and how long do we need them and what are our plans. There are industries we need to exit. We do that every year, and we look at our overhead every year and we benchmark ourselves with our competitors every year.

It's a little more complicated when a company gets as complex as ours is, and we are a small company, but we operate in a lot of different arenas. But we are very good at it. And I think we are going to always be able to somewhat match -- revenue obviously is a big moving part in that equation, but we are always going to be able to -- or try to match very aggressively our SG&A to where we are.

Good. Thank you. My final question was just, you mentioned that margins in the water and wastewater side have been weak recently and they've been very selective looking at those projects. Just wondering if there has been any change in your view on that market. I think maybe -- I think there is a lot of stimulus funds potentially heading that way. I'm just wondering if there's -- that or any other development has changed your view on that side.

It is always a tough market because the preponderance of water and wastewater is for public agencies, and they are required by their local laws to have an open bid process. And to be qualified to participate in an open bid process, all you have to do is be able to hoist up a bond. So it opens the door to tremendous [amount] more competition, because there is no prequalification.

And then the low bidder gets the job. You can't make any amendments or suggestions or shared savings or value engineering, because they would deem your bid unresponsive. So it is just a tougher market. And then when you get a lot of that work, sometimes you are sorry because you are dealing with public agencies that -- they are the party of no.

But there is opportunity there, and we are seeing that in the fact that because the public agencies don't have a lot of money, we are still seeing entrepreneurs willing to play in that arena. And when you were dealing with entrepreneurs and private entities, there is different contract techniques and it is less competitive. We are engaged in one right now, which is what we call a beauty contest, with one of the towns, actually, in California. But since it is design-build, they can actually do a more detailed bid and allow you to do valued engineering and everything else. And we are seeing more and more of that, and in this case, there is only three bidders, and it's a fairly large -- it is $100 million plus job.

When we get about 15 or 16 or 20 bidders or 30 bidders, we just don't play. And a lot of this water/wastewater, particularly the smaller projects, under $40 million in California, you see that many bidders. Above $30 million or $40 million, it gets strained out a little bit, and you see maybe four or five bidders. And that is the arena we like to play in. But it has to match our skill set. So they are out there. We are patiently waiting for them.

Thanks a lot, guys.

[John Rick], Rochester Wealth Management.

Good morning. I am reading in the proxy that you would like to increase the authorized shares to 90 million from 60 million. I assume that is to do acquisitions, using your stock as a currency, though I think we both agree your stock is at a very depressed level. Could you talk about those 90 million shares and -- again, using your stock as a currency, etc., and at what prices it would make sense? Thank you.

The first part is the -- going to the 90 million shares by itself, we want to do that now so that we could get authorization from our shareholders, and if the proper opportunity presented itself, be in a position that that part of the equation was done.

We obviously want to use -- if the right acquisition comes along, we want to be able to use our stock as currency. At its present value, as Brian said in his comments, it is not serving that purpose necessarily. Part of what we looked at is that if the warrants that we have outstanding are exercised, the remaining shares outstanding started to get close to where we were in our current authorization. So the Board decided it would make more sense to make this transition and have that part in place.

It certainly doesn't mean that we are ready to issue any of those shares. That part of the proxy is probably more a perfunctory change than anything else. Obviously, the right acquisition would have to be at the right price, and it doesn't make any sense to do a total dilution of our shareholders.

Any acquisition, even if it is largely cash, you need some shares, some script, as part of the process, because you want to lock your management in to future earnings without having just mechanical earnouts and things. Plus, to be honest with you, we could throw it into the proxy and we wouldn't have to pay for it twice. And if you're going for a little, and then the cost in having the outstanding shares in Delaware, when you get to a certain level, additional shares don't cost anything. So don't read too much into the 90 million.

There are no further questions. I will now turn the conference back to management.

I wish to thank all of you for spending time with us this morning and listening to us and engaging with us. I especially wish to thank all of our shareholders, who have given us their faith and support, and remind them of our shareholders' meeting scheduled for 10 a.m. on May 19 here in Irvine, California. In these difficult times -- very difficult times for some, I'm truly honored by your belief in our Company. And we are working very hard to justify your faith in us.

So with that, I would like to say thank you very much, and goodbye.

Ladies and gentlemen, this concludes our conference for today. Thank you all for participating, and have a nice day. All parties may now disconnect.