Primoris Services Corp (PRIM) 2016 Q4 法說會逐字稿

Greetings and welcome to Primoris Services Corporation 2016 fourth quarter and full year financial results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. (Operator Instructions). As a reminder this conference is being recorded.

I would now like to turn the conference over to Kate Tholking. Thank you. Please go ahead.

Thank you, Brenda. Good morning, everyone, and thank you for joining us today. Our speakers for today will be David King, President and Chief Executive Officer; and Pete Moerbeek, Executive Vice President and Chief FinancialOfficer.

Before we begin, I'd like to remind everyone that statements made during today's call may contain certain forward-looking statements includingwith regards to the Company's future performance. Words such as estimated, believes, expects, projects, may, and future or similar expressionsare intended to identify forward-looking statements. Forward-looking statements inherently involve risks and uncertainties including, without limitation, those discussed in this morning's press releaseand those detailed in the risk factors section and other portions in our annual report on Form 10-K for the period ending December 31, 2016, which was filed this morning, and other filings with the Securities and Exchange Commission.

Primoris does notundertake any obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as may be required under applicable securities laws.

I'd now like to turn the call over to our CEO, David King.

Good morning, and thank you for joining us today to discuss the fourth quarter and 2016 full year results. I'm extremely pleased with how the 2016 year wrapped up. We finished strong in the fourth quarter with better revenues in Q4 2016 as compared to Q4 2015.

During the fourth quarter, we continued to reduce our SG&A cost by an additional $1.2 million, which contributed to a total of $10.9 million reduction in SG&A costs for the year. We generated an additional $12 million in cash flow from operations in fourth quarter,and we were free cash flow positive for both the quarter and the full year, ending the year with a strong $136 million cash balance.

Q4 2016 saw us continue to build our backlog both in MSA and project work, and it now stands at $2.8 billion,a 34% increase over 2015's year end backlog and a record for our company.

And as I -- and, as you can tell from the recent announcements we have been making, the trend continues into 2017. We already announced an additional $459 million in new awards so far in the first quarter. Our opportunity list is as strong as I have ever seen it and the quality of those prospects is very good. We were able to close out the year exceeding our new awards goals and are off to a great start in 2017. We continue to selectively choose which projects we pursue and which clients we work with for the best success and margin performance.

We also experienced an 18% reduction in our 2016 ASHA recordable incidents and had zero loss time incidents for the entire year. I'm proud of the many safety awards our various businesses have been receiving. This outstanding safety culture was recently recognized on our Florida LNG project by the E&R magazine in their southeast best projects category.

Before I ask Pete to go over the financials, I would like to highlight a few items. Our accounts receivable and CIEBI billings continue to be a focus and I'm proud to report that our internal DSO ranges from 38 to 48 days. Our outstanding legal disputes are progressing as we expected, with the real possibility of an ATM settlement this year. We are also raising our EPS guidance and continuing our dividend as noted in our press release.

Our M&A activity remains strong and we are seeing some positive movements in that area. I will begin with an update from an operations perspective of the civil business which includes both our highway work and also our I&M work.

Last quarter we announced our intention to sell the Texas Heavy Civil business. We currently have interested parties and expect to be analyzing those offers next month. As previously indicated, we have not discontinued our operations, and unless we realize the proper value for this group, we will continue our Texas Heavy Civil operations.

I'm pleased to say that we have achieved substantial completion on two of the large Belton area jobs along the I-35 corridor. The new Heavy Civil Senior V.P. Mark Buchanan deserves a lot of credit for getting the Texas Heavy Civil division working more effectivelyand we expect to see continued improvement in 2017. We are also seeing good potential in the change orders and claims we have relative to those I-35 projects but we still have a long way to go.

Our Louisiana Heavy Civil operations continues to perform well including a recent $124 million award for additional work along the I-10 corridor. The I&M group has wrapped up the majority of their initial scope on the large petro-chem facility in Lake Charles which led to the most fourth quarter revenue declinefor this group. But we are now seeing success as they bid on continuing presence work at that existing site.

We also recently announced a $30 million award for the division at a new methanol plant with the potential for scope expansion there also. With these new wins, I feel better today than I did a year ago for the I&M 2017 prospects. Jonas Beatty and his group have a great prospect list in front of them.

The improvement in the commodity prices has also had a positive impact on our power industrial groups as customers are gaining confidencethere is some stability in energy markets. Natural gas prices below $4 are driving investment in industrial projects and LNG peak shaving facilities.

We recently completed an LNG facility for transportation fuels and we now announced a new $100 million LNG peak shaver. Our traditional power work in California was delayed in 2016 by regulatory issues but we are pleased to announce that the final legal hurdle has been cleared on the 500 megawatt natural gas combined cycle and we anticipate full notice to proceed tomorrow, March 1. Tim Healy and his team has worked tirelessly with our customers to accommodate for the permitting delays and I know he is as excited as I am to move forward on the project.

We started work also in the fourth quarter on a power job on the east coast where we are relocating a simple cycle gas turbine to an existing facility. During the fourth quarter, we also acquired the assets of a small EPC solar construction company which gives us full turnkey EPC capacity in the renewable power markets under the brand of Primoris Renewable Energy. I'm optimistic we will be making new business announcements for them in the near future.

Our ARB industrial team has been involved in alternative power projects successfully completing construction on a 20 megawatts electrical storage capacity facility in California. It is currently the largest battery storage facility in operation in North America, with other battery storage projects being planned.

Our industrial work in the Gulf Coast region continues to be driven by the successful petrochem project in Lake Charles. We announced an additional $138 million in work for this project in October and we expect our industrial team, led by[Conrad Borg], to remain on site through the third quarter of this year. Their prospects for new awards continue to improve as stability in energy prices give our clients increased pricing certainty.

You have also heard me mention on past calls about Primoris moving further up the industrial project cycle. There is a segment of the industrialproject market which we believe is under served by the larger EPC companies, namely the small to mid sized capital projects for refining petrochemical and gas processing industries. After searching for an engineering acquisition that would allow to us target this market and not finding the right company at the right price, we decided to create on own entity. We have experience in doing this. As you may remember that our OnQuest Engineering group was formed in the same manner.

I don't want to go into too many details right now, but we will be making a more formal announcement in the next month or so. Our OnQuest engineering group, led by Randy Kessler, continued focusing on the execution of the PDH heaters in Canada, hot oil heaters for LNG facilities on the Gulf Coast and has begun work on three new diesel hydrotreater heaters for our US domestic refinery. Fourth quarter saw them also finalize the contract terms for a new LNG peak shaving facility we recently announced.

Our utilities and distribution businesses remain a dependable stable business for Primoris. Scott Summers' ARB underground team and Jason Osborn's team Q3C teams both had profitable revenue growth in the fourth quarter, helped out by a mild start to the winter. Our work with California utilities has remained strong and it looks like a planned (inaudible) for one of the larger California customersis now being delayed into 2018.

In the Midwest, we have also been successful pursuing MSA agreements with existing and new customers and extending our geographic reach. Our MSA backlog of $671 million is at the highest level in the company's history. While MSA backlog is the best estimate and our clients are not obligated to give us work under the MSA, we are getting better andbetter at estimating our MSA revenues. Our 2016 MS revenues came within $5 million of o our initial backlog estimate. We are also now seeing our electrical transmission group in the Midwest seeing a very encouraging uptick in securing new businessand bidding opportunities.

I will end my comments with our pipeline and underground business. The outlook for smaller diameter pipeline market is seeing improvement and we are building name recognition for our Primoris pipeline group, our (inaudible) Sprint acquisition. In December we announced $20 million of work for this group at the Lake Charles petrochem project, and we are pursuing spreads on larger projects that we feel optimistic will be awarded. Our Florida Rockford pipeline jobs are well underway and our project supervisors Mickey and Dickey Langston are doing an outstanding job keeping those projects on schedule. We expect that work to wrap up late in the second quarter.

Our joint venture, Spring Ridge Constructors, formally awarded the spreads for Atlantic Coast Pipeline project so weincreased the value of the project in backlog by $55 million to $680 million for our portions. We have four spreads on that project and we do not expect our work to begin until the first quarter of 2018. This means we have some capacity available in the second half of 2017.

We are actively bidding on additional large diameter work and we feel confident we will win our fair share but we are being very strategic in what we pursue, concentrating on the quality of the prospect, the customer and contract for our remaining capacity. Frank Welsh and Josh Ramsey continue to surprise me each day in what this group can perform.

The large diameter pipeline market looks to be strong for us through 2018 and 2019. With that in mind, we want to showcase one our projects and give investors a deep look into the process of constructing a pipeline. We will be hosting an Analyst Day on April 7 in Florida with a morning of meetings with our senior management followed by a site visit to one of our pipeline projects. Because of site constraints, attendance limited to invitation only, but the presentations will be made available on our website.

As I look ahead at 2017, the benefits of the diversified strategy clear as we have multiple end markets driving strong backlog growth, especially for infrastructure markets in the pipeline, industrial and utilities and distribution markets. We recently held our strategic planning meetings and came away with each business unit having strong organic growth opportunities.

We entered the 2017 year with a balance sheet that remains strong, with growing tangible net worth, a solid cash balance and low cost debt. We have improved visibility on major projects, such as our California power job and large diameter pipeline projects, we continue to look for acquisitions in targeted markets, such as the UND market, and where we can't find the right acquisition, we are looking for ways to grow the business organically. All are our operations indicators are pointed in the right direction.

With those comments, I will turn it over to Pete Moerbeek, our CFO, for his comments. Pete?

Thank you, David and good morning, everyone. We filed our Form 10-K this morning. Since it took us about 58 days to write it, I don't expect that any one listening has had a chance to memorize it but the information is now out there for your reading pleasure.

Completing the filing also means that I can limit my remarks to just a few highlights. Our 2016 fourth quarter revenues were $601.9 million, a 21% increase over the 2015 fourth quarter revenues. The revenue increase was driven by increased revenues in the west segment as our large Florida pipeline jobs took the top two spots for customer revenue for the quarter. We also saw revenues from two of our large utility customers, one in California and one in the Midwest, increase.

Unfortunately, revenues in both the east and energy segments declined, driven primarily by a decrease in total revenue of almost $50 million at the Lake Charles, Louisiana, petrochemical construction site. But also driven by closeouts of projects at James industrial and OnQuest prior to this year's fourth quarter.

Our tech stock revenues increased by $10 million to almost $52 million for the quarter. We are still in a process for the planned divestiture of the JCG Heavy Civil division, and we expect that we will have enough information to make a decision within the next two months.

Gross margins in the 2016 fourth quarter were 11.4% compared to 12.8% in 2015's fourth quarter. While the west gross margin remains strong at 14.9%, it was down slightly from 2015 when we benefited from closeouts on large projects at both Rockford and ARB Industrial.

Gross margins in the east were impacted by both the reduced revenues at I&M as well as the continued challenges in the Texas Heavy Civil division, although to a significantly lesser degree than this year's third quarter. Fourth quarter over fourth quarter, gross margins in the energy segment declined from 13.8% to 12.6%, reflecting the impact of unfavorably closing out two jobs.

Selling, general and administrative expenses declined by $1.2 million in the quarter, compared to 2015 fourth quarter, and by $10.9 million for the full year. SG&A decreased to 7.1% of total revenues compared to 2015's 7.9% of revenues. We anticipate continued improvement in 2017, especially as revenue increases.

For the quarter our provision for income taxes was $11.9 million for an effective tax rate on income attributable to Primoris of 45.1%. That compares to 2015's fourth quarter provision of $8.8 million for an effective tax rate on income attributable to Primoris of 41.2%. At the end of the third quarter, we expected a full year effective tax rate of 43%. But our actual rate is 44.2%, so the fourth quarter represented a catchup.

Our fourth quarter net income attributable to Primoris was $14.5 million or $0.28 per share,a $1.9 million increase over 2015's fourth quarter net income of $12.6 million or $0.24 a share.

We ended the year with $135.8 million in cash and cash equivalents on the balance sheet, and tangible net worth of $337 million. For 2016, our operating cash flow was $62.6 million, a $14 million improvement over 2015.

Our goal for capital expenditures is to invest an amount equal to the sum of depreciation, amortization and net proceeds from equipment sales. At a total of $58 million in 2016, we spent less than our goal. At present, we believe we will spend around the same in 2017 as we did in 2016.

As David mentioned, during the fourth quarter, we acquired the assets of a small solar-power EPC company for $6.9 million using cash on hand. There was no earnout contingency associated with this purchase and we have no such earnout contingencies remaining on the balance sheet from previous acquisitions.

In the fourth quarter we also purchased and canceled 207,800 shares of stock for a total of about $5 million. The Board of Directors has authorized an additional $5 million share repurchase program for 2017 that will expire at the end of the year. At this time, the intent of the repurchase program is to purchase shares that will be issued to directors and managers during the year.

Our total debt at year end was $261.8 million, which included $168.7 million in equipment notes and $92.2 million in senior secured notes. And our debt to equity is 52.6%. Our weighted average cost of debt is 2.9%.

Our backlog at year end was a record $2.8 billion, $103 million increase from the end of the third quarter, and a $710 million increase from the end of 2015. As we have already announced, an additional $459 million of new awards in the first two months of the year, I think it is safe to say that we are excited about the opportunities going forward. That comment leads to guidance.

The easy part is for me to say that for the next four quarters, we expect earnings attributable to Primoris will be in the $1.00 to $1.20 per share range. The slightly more difficult part to identify some of the key assumptions. First, we are assuming no collection from the ATM collection matter. We believe we will resolve the issue in 2017, but at this time there is no way to assign a value. Secondly, we are including no assumption for the results of the divestiture of our Texas Heavy Civil business.

Third, we are assuming three quarters of Carlsbad with our traditional conservative approach at the start of the project. Fourth, we are assuming minimal utilization at Rockford after the two Florida jobs. And finally,we are assuming an overall effective tax rate for earnings attributable to Primoris of 40%. We hope that we are being overly conservative with that assumption.

Finally, let me briefly talk about our financial segments. Earlier in the call I said that our two best jobs in the fourth quarter were in Florida in our west segment. Hopefully this is the last time that I will be so geographically challenged. We will present our financial results in different operating segments starting with the first quarter of 2017. The new segments reflect the way that David and Tom manage our business, and yes, they are more aligned with our end markets.

We will provide the historical information for both the new and old segments for the last eight quarters by filing a Form10-K in the next few weeks. By waiting, we don't ruin anyone's fat Tuesday. With that I will turn it over to Brenda for your questions.

Thank you. (Operator Instructions). Our first question Domes from the line of Stefan Neely with Avondale Partners. Please go ahead with your question.

Good morning, folks. Thanks for taking my question.

Good morning.

I wanted to start off, had a little bit of a question. I wanted to clarify for Carlsbad, how you were including that in the full year guidance. You said three quarters. Are you excluding three quarters of the project or just for three quarters of the year? Or of the next four years?Next four quarters, sorry.

No, we are not really looking at much. It is slow coming out of the ground. So I think you will see our operation start ramping up throughout the year. But the project goes into next year, obviously, into 2018.

Perfect thanks. Curious if you could give us a little bit of update on the pipeline integrity business in California. I know you had said there was kind of a slowdown in spending, particularly in southern California that you were seeing. How is that progressing for you?

Well, I think -- I think as I mentioned, even on the last call, we have continued to add MSA work out there. So we are -- our potential for more work of that type and nature in California continues to grow. We have got one customer who slows down but that is typical of that business in California. You have some customers that will exceed it forward. Some that slow down. It goes back and forth. We've always made comments that it is still California on some of that spending. But for us right now that is still a very healthy market and we are still seeing it very healthy.

Okay. Excellent. And my last question is just quickly I know -- speaking of California, it seems they had a lot of rain out there. So far in Q1. Is that anything you guys are seeing any impact from at all?

We have seen some impact from it. I wouldn't say it has been a major impact on us. Obviously, on our utilities and distribution sideScott Summers' group is out there and we had some days they couldn't get in there and do the work. And since we were beginning to comeout of the ground on the NRG power plant project, that was a hole filled with water that we had to pump out and start over. We have had some effect but I would not call it a major effect on us.

Excellent. Thanks a lot. I will get back in queue.

Thank you.

The next questions from the line of Matt Duncan with Stephens. Please go ahead with your questions.

Good morning, guys.

Good morning, Matt.

First question I have got is just on the west segment. A really strong revenues quarter there. Trying to get a feel for how much the improvement there sequentially was the pipeline projects in Florida kicking into full gear? And I think you guys mentioned there might have been a weather benefit, too. If you could quantify what that might have been, that would be helpful.

I'm not sure on the weather benefit. What you are looking at is very strong contribution as we noted -- that the two biggest jobs that we had for the quarter came out of Florida. So that obviously is a major contributor. And we also benefited a little bit from the fact that it didn't snow quite as early in Denver and Minnesota as it traditionally does. So we were able to work a little later in December.

Got it.

Biggest impact came out of Florida.

The weather was the mild winter for Q3C. Q3C was able to work longer in the winter than they typically do.

Got it. Interesting that you guys are assuming there is not much for Rockford after the Florida job. Understand until you know what there is, it is safe to be conservative there. But it sounds like that market is pretty strong. What are some of the projects you guys are looking at for after Florida is done beyond just Atlantic coast? What is the timeline look like on that stuff? Are there smaller projects that you could fill the back half of this year with? Just give us thought is on what the market looks like from a timing perspective?

Definitely, Matt. By the way, it doesn't mean that our Rockford guys are not working as they come down off the Florida project. We have small projects booked in there. They just won't be at full utilization.We talked the last two quarters, we knew that they might not be at full utilization toward the latter half of this year, so we actually went out -- and we want to be selective on which projects we go after so that we get a good customer and a good terms and conditions, but also it fits that latter half of 2017 time frame that we are looking at.

I don't want to individually talk projects, Matt, but I will talk some customer names and things like that. We do have lot of work with the Enterprises and Williamses and others like that and they have projects that I believe will award and execute in that time frame toward the latter half of 2017, as well as several other customers. So, we're -- as I mentioned in some of my comments, I'm fairly optimistic that we will pick up one or two of those projects and be able to use that utilization. But being very cautious right now before we say we're filling that the utilization up.

Makes perfect sense. Last thing and then I will head back in the queue. Just on the small pipe work now that we flipped the calendar to 2017, your energy customers are in the new budgets, which I think would be helpful. Have you begun to see actual demand improve? I know your customers will likely be more optimistic, but is it resulting in a move higher in revenues for the energy segment as you have gone here into 2017?

Let me make this comment, our estimating group on the smaller diameter pipeline projects is as busy as they have ever been in literally the last couple of years. A lot of bidding opportunities. A lot of pretty good projects coming up. And, in fact, Patrick McRae who runs the PrimorisPipeline group told us the other day he had 10 bids in the first two months of this year versus 20 bids for all of 2016. Maybe that will give you a flavor for how the market is turning around from a demand standpoint as far as the request for bids are concerned.

Now, some of those -- not all of those will materialize. But we track those jobs very closely and I can tell you,we look at the goes on those projects and the get percentages and things. I do feel that you are going to see more announcements from us with regard to the small diameter pipeline business in 2017.

Great. Good news. All right. Thanks, guys.

Our next question comes from the line of Ryan Cassil with Seaport Global. Please go ahead with your questions.

Good morning.

Good morning, Ryan.

I guess just going back to your comments on the pipeline market. You talked in the last call about $6 billion award funnel. A lot of small and medium sized projects. And it seems consistent today, but are you seeing projects skew a little bit larger? Or is it still a real healthy market of the smaller work out there?

On the large diameter we're still seeing the skew to fairly large projects. There are some smaller ones out there but on the large diameter pipeline business, those skew to the heavier larger projects. On the -- interesting on the small diameter, Ryan, some of these small diameter projects going in are long distances. So they will be fairly large projects from a spend perspective even though they are small diameter but going quite long distances, five, six, seven, eight hundred miles on some of them. At the same time the laterals that come off of them and some of the other interconnect lines spur some of the smaller pipeline jobs also. So, I hope that answered your question but that is kind of what we are seeing.

Okay, great. And then you talked about you got you know the [Sasaw] project coming off and we have seen some nice industrial awards here recently as well. I mean, are things picking up in the industrial petrochemical market? Can you talk about what you are seeing there?

We never really saw -- and now when I talked to the industrial and petro chem, let me separate that a little bit by -- really further. When you really look at the petrochem side, we never really saw much of a drop off on the petrochem side. The natural gas praises at the level they are at continued to spur a lot of those projects. A lot of those projects are the size of that Lake Charles facility, so they are mega billions of dollars. So it takes longer for the customers to materialize those projects. In other words, the germination period is longer.

We still have seen lot and you have seen us announce them -- even last year a lot of the smaller project is on the petrochem side, the methanol projects and some of the hydrogen related projects and things of that nature. They are not the mega billions of dollars of projects. We never really saw the petrochem side drop off.

What we are seeing now that we probably did not see last year as much of is some of the other types of projects that are more the refining-based projects as well as the pet chem projects. And we are beginning to see more -- and I want to separate the LNG market into two categories. We are beginning to see a little more on the large LNG projects that we are just a sub contractor that performed field services work on those. And then obviously we are still seeing the small LNG projects that we do, the engineering and construction on. So we are absolutely seeing more uptick interest in those kind of projects also.

Great. Thanks. I will turn it back.

Our next question comes from the line of Lee Jagoda with CJS Securities. Please go ahead with your questions.

Good morning.

Good morning, Lee.

So just starting with the MSA side of the business, how much additional capacity do you think you have within your current footprint to add to the MSA work on an ongoing basis? And then what is the pipeline for acquisitions in that side of the business look like, given that that is one of your areas of emphasis?

What I don't really look at is capacity limited. There a capacity that you have from a limit standpoint. But the way I tend to look at our capacity on this MSA work is -- and I can go to the Q3C group as kind of an explanation of why I feel this way -- as those MSA or customers want us to do additional work, we add additional resources, we grow organically into the area they want us to grow and so we just keep expanding as we go. And as you can see, we have done that with Q3 from maybe a $90 million revenue entity to a $300 million revenue type entity. I don't really categorize there as having a capacity limit. The same thing true with the ARB underground group. They continue to grow each and every year in the MSA work in capacity.

When you start looking at acquisition base, obviously when we are not in the geographic area that ARB touches or Q3C touches, and is not a neighboring state that would make it easy from an organic growth area, then we do look at expanding into those areas. Although I'm not ready to make any formal announcements, I can tell you we had some serious discussions on another acquisition that is an MSA-based utilities and distribution organization. If I could leave it just at that time that, I will make a comment generally that they are in an area that we currently don't cover. We have been trying to find an entity like this in that particular region for probably the last year to year and a half, and finally think we have got the right entity. So, you will probably be hearing us talk about that sometime in the next couple of months or so.

Great. One for you, Pete just on Carlsbad. Remind us of the size of the opportunity and how the math works with regard to the noncontrolling interest?

Right at a little over $200 million. And, it is a 50/50 JV with [Burns and Mac]. We do all the -- we recognize 100% of the revenue and then that noncontrolling interest line all the way at the bottom of the income statement is where we take out their half.

Got it. Perfect. And then one more from me and Ile hop back in -- and I will hop back in. As relates to the east and short fall in profitability. Is there a way to break out the tech stock related issues versus the rest of the business and then highlight if there were one or two other issues that impacted that?

Well, we -- when I think David said that on the area that we had the challenges, which is the Belton corridor, where we took the huge loss in third quarter, they finished two of the jobs. We lost or expensed about $3.4 million of those jobs in fourth quarter. We do believe that we have the opportunity now to go back in on those two jobs and start negotiations with TX DOT on claims and all sorts of wonderful long-term negotiations that we will -- that we actually have begun. The operations in the rest of Texas outside of that corridor were profitable for the quarter. And Louisiana was slightly profitable for the quarter.

Yes, let me add a little bit more color for you, Lee, if I can, on what Pete's saying. If our Texas Heavy Civil, we had that I-35 corridor, those Belton projects, those were the areas that we struggled on. When you look at the rest of what we have in the Texas Heavy Civil, the airport work, some other municipality work, city works, things of that nature, all of that has been performing very well and looks like it will continue to perform well.

The issue on that I-35 corridor has to do more with and it is the way we -- the way we have always -- I guess Brian used to use the old comment, take your (expletive)-eating once type thing. But those contracts don't allow you to settle up on your claims and extensions and things of that nature until the projects are complete. And so that is why I mentioned on my prepared notes that we have closed out two of those jobs which now allows us to go forth with some of those claims and change order requests. But again, we are way too early in that process for me to report any positive news therein.

Great. Thanks very much.

The next question from the line of Bobbie Burleson with Canaccord. Please go ahead with your questions.

Good morning. Curious on Texas Heavy Civil on the bid pipeline there, and if you are seeing benefit from Prop 7?

Prop 7 is going on more new is still in the engineering stages of it, but we are beginning to see early indications of some of the smaller spend on that and some very small highway sections. Now, we have been -- because of the issues we have had on those jobs in TX DOT, we've been very selective on what types of margins and contingencies and which projects we go after, and whether or not we figure that TX DOT has all the prepared right-of-ways and permitting and things of that nature, so we don't fall victim like we did before on some of that I-35 corridor work. We are beginning to see some of that.

Remember some of my comments on the last couple of calls relative toTexas Heavy Civil. We really began refocusing that group almost a year ago to go after more airport work and municipality work, which has a higher margin benefit so it than going after some of the TX DOT work.

Sure. Okay. And then just on the -- with some of the other new markets you are moving into with some of the petrochem opportunities that you are starting to look at, what are the respective margins there relative to your corporate average?

Again, we are changing the -- we are changing the way we segment, but if you remember the old segments in the east -- the petro chem business is the percentages we talk about from the gross margin percentage from the energy segment is pretty consistent with what we would see on that type of work.

And we tend to be in the low teens.

Yes.

Okay. Great. Thanks.

Our next question comes from line much Jason Wangler with Wunderlich. Please go ahead with your questions.

Good morning. Was curious as we look at the guidance and what you talk about with the larger projects kicking off and Carlsbad as well here soon; do you see the same type of seasonality in the business as far as we should look at the modeling perspective with the guidance you gave? Or do you think there will maybe a little bit more of a smoothing effect because of those larger projects?

I will let Pete address it. I believe there will be more of a smoothing effect. Pete, talk about that.

I'm not sure if I want to call it smoothing. I think you will see stronger revenue and profitability in the first two quarters because of the large jobs that Rockford has in Florida. Then obviously you going to see the stronger MSA work in the second part. I don't know yet and I think we have kind of alluded that we are not sure how strong Rockford will be in the third and fourth quarters. On the other hand, you are starting to see by then, the NRG job come out of the ground. So I -- it is hard to say that it is going to be perfectly smooth but I don't think you will see as big a drop off as we have in the past in the first and second quarters.

Okay. And maybe one on Carlsbad, specifically. The $200 million or so and you got three quarters of work there. I think you are trying to finish it by third quarter of 2018. Should we look at that as being, you should have half of the work done this year and half of the work done next year, or maybe the cadence of that?

When you come up out of the ground, your costs are not as high as once you come out of the ground and doing a lot of mechanical and piping and instrumentation and electrical. If you are trying to weight it, over that 18 month period, you are probably talking about 30% or 40% in the first nine months and 60% to 65% in the second nine months would be a pretty good weighting.

Great. Thank you. I'll turn it back.

The next questions from the line of Brent Thielman with D.A. Davidson. Please proceed with your questions.

Thanks, good morning.

Good morning, Brett.

Back on the ONG opportunities out there, any sense on how the micro, the mid size facilities going to come in for you 2017. Are they front half, back half weighted booking opportunities? And for the larger plants, is that something that looks like a 2018 event for you, in terms of doing some work on those or could that come sooner?

Let me talk about the small to mid sized first. Most of what we will be chasing at the start is going to be more feed type work, not really the procurement in the construction side of the small to mid-sized projects. What you will see in 2017 relative to that market we are beginning to chase is going to be fairly small from the standpoint of a revenue generation. I think then those kind of projects materialize into the full EPC work. So those would be more of a 2018 effect on us.

As far as the large petro chem projects and things, a lot of those larger petrochem projects, as they develop, are not going to finallation until the latter part of year. However, some of up front and some of the off sites work that typically are I&M group and civil groups do would potentially start in the latter half of this year.

And obviously, we do have the benefit of the job that we announced recently -- the $100 million job for OnQuest. So that is starting now.

Yes, the LNG project that we entered for OnQuest is a full EPC job for us.

Okay. Okay. That is helpful. And then I guess on the east segment, any comments on the pipeline of upcoming work you are seeing for the non-Texas civil business?

We just announced a good sized I-10 project and we think there are some other ones -- that hopefully Louisiana will be in a position to start increasing their lettings. We have always -- or we have traditionally been first or second in awards, but being first or second in a much smaller pond isn't quite as exciting. I think we are starting to see more opportunities in Louisiana. We have done back in Mississippi and Arkansas and we will have to wait and see as the year goes on certainly if there will be any other infrastructure projects announced by the new administration that could be a real positive. There are projects needed in the Louisiana area.

Okay. Thanks, guys.

Thank you.

Thank you. (Operator Instructions). Your next question from the line of Tahira Afzal with KeyBanc. Please go ahead with your questions.

Good morning, folks.

Good morning. Good to hear your voice again.

Same here. And Pete, good to know you haven't lost your wonderful sense of humor.

[LAUGHTER]That isn't what Brian used to call it?[LAUGHTER]

So I guess first question is, it seems like as I look beyond 2017, 2018 is shaping up nicely from the pipe side, both on the integrity side and the large pipe side. And it seems on the industrial side, you are going to be kicking into high gear again as well. Is there a chance that if execution goes well you could end up again at that 6.5% operating margin sort of profile in 2018? Or do we need to have some more power gen replacements coming through to really get there?

You just hit us right on the spot with that question, did not you, Tahira?Tough day. I will let Pete comment on the margin performance in a moment.

But the market is shaping up. I do feel that. Obviously we are being cautious because some of these large projects on this industrial side, the mega billion ones that I talk about that will drive revenue and margin performance for us have not yet been sanctioned, although I think the dynamics are there. And they are certainly moving that direction and I would say the percent go on them is very high. So I'm a little cautious to start waving the flag too much just yet. You're right. I do see the large diameter pipe business and the MSA work shaping up, fairly nicely going all the way into 2018. We certainly see enough opportunities to have that robust growth in the industrial market.

As far as the performance piece, I can tell you my perspective. The jobs we are going after, we really tightened the belt relative to terms and conditions and payment arrangements and things of that nature and obviously project controls around the projects and things of that nature. So I -- as I said here today, you can never predict that you're not going to have something that doesn't go wrong, but I certainly thing that the chances of anything going wrong on some of our projects is very, very low. But Pete, what do you think on her other question?

I think I will avoid the litany of all of the issues associated with new revenue recognition standards and all those sort of wonderful things, and say that we think that our SG&A is under control, we think that we have the ability, and the opportunities are there. Not sure if we're ready to commit to whether that is a 6% or 6.5%. We probably need to get a little more operating room at kind of where we are currently. But I don't think it is impossible for us to start approaching those sort of up ins.

Great. And I guess a second question is how are you all looking at labor inflation in the gulf area, especially into next year? You have the gathering work picking up again and I assume that some of the basic labor pullout there. And God knows, you might have a big war coming up and that might soak up some labor. Would love to get a perspective on the pipe fitters, et cetera, which is more specialized, and really the labor pool as well.

Interesting question. We watch that, trust me we watch that almost daily but we haven seen it yet. Even a few years ago when everybody talked about oh, no, here it comes, it never did materialize because a lot of those projects didn't hit at the same time. I'm suspecting that may be the came case that happens here. There will be some pockets on these major, multi billion dollar projects, there will be pockets that have a little higher labor rate, but some of those people will travel and some won't, And so in some of the other areas we probably won't see as much of a labor inflation.

We put escalators in our contract to try to cover us on those things. But I know your question is more are we actually seeing some of that right now, and we are really not just yet. Same thing with materials. We haven't seen in an increase in material prices yet. No matter what the material is. We really haven't seen an increased cost for that. If it occurs, I don't think it would occur until really late in 2017 or maybe even not until mid-2018 in my opinion.

Got it, okay. And then I guess last question is on the buyback. Seems a little on the small side, David and Pete. Any thoughts around if that could be expanded or in terms of cash allocation, what you guys are thinking?

Just because I started off by saying at this time. The current buyback represents. We go through quite regularly with the Board and look at what are we going to do, we have cash and obviously our first priority remains finding good accretive profitable acquisitions. We have obviously not done a great job of that over the last couple of years. We think we have some opportunities now.

I think that if this year progresses as we expect it to, then that will take some of the cash. If that doesn't happen, I think you will see us doing two things. One, we'll l probably increase the dividend, that is not a material change as far as cash is concerned. And yes, the Board seriously consider, and has in the past, talked about doing a stock buyback that would be a larger number. We are a kind of used to Brian having 20% ownership. I think we are all afraid of him owning much more.

Fair enough. Pete, you can buy some, too. [LAUGHTER]

That is a good question. Thanks, Tahira.

Thanks.

Thank you. It seems we have no further questions at this time. I would like to turn the call back to David King for closing comments.

Thanks, everyone, for participating on the call today. I'm pleased with the revenues and the profitability momentum that we are experiencing and the record backlog that the company has achieved. The momentum build Americas if infrastructure for us continues to grow and we see multiyear opportunities ahead for Primoris. We appreciate your participation on the call, and have a good day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may disconnect your lines at this time. And have a wonderful day.