Tutor Perini Corp (TPC) 2017 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Tutor Perini Corporation Second Quarter 2017 Earnings Conference Call. My name is LaTonya, and I'll be your coordinator for today. (Operator Instructions) As a reminder, this conference is being recorded for replay purposes. (Operator Instructions)

I would now turn the conference over to your host today, Mr. Jorge Casado, Vice President of Investor Relations. Please proceed, sir.

Good afternoon, everyone, and thank you for joining us today. With us on the call are Ronald Tutor, Chairman and CEO; and Gary Smalley, Executive Vice President and CFO.

Before we discuss our results, I will remind everyone that during today's call, we will be making forward-looking statements, which reflect our current assessment of existing trends and information. There is an inherent risk that our actual results could differ materially. You can find the discussion of our risk factors, which could potentially contribute to such differences, in our annual report on Form 10-K, which was filed on February 23, 2017.

The company assumes no obligation to update forward-looking statements, whether as a result of new information, future events or otherwise, other than as required by law.

With that, I will turn the call over to our Chairman and CEO, Ronald Tutor.

Thanks, Jorge. Good afternoon, everyone, and thanks for your participation in our call. We are continuing to experience the benefits of high demand for our services in both the civil and building markets as our backlog moves closer to an all-time record. Another highlight of the second quarter was the favorable settlement of our auction-rate securities litigation, which resulted in our receipt of $37 million. However, during the second quarter, as a result of project closeout activities and negotiations around those closeouts, we wrote down a number of mechanical jobs, primarily in New York in our Specialty Contractors segment. As a result, our operating results this quarter were less than anticipated. Gary will go over this and all other financial details later in the call.

Second quarter new awards and adjustments were $1.6 billion. Keep in mind that this followed a very strong first quarter that included $2.1 billion of awards. I will review the more significant second quarter new awards a bit later.

The Civil segment has delivered the majority of our new awards during the first half of this year, and the strength of our bookings and current backlog reflects a positive end market demand we have been pointing to for several quarters. Furthermore, our backlog growth is occurring even before we begin to see the impact from the FAST Act and various new state and local funding programs that have been approved.

I would also like to point out that we are continuing to win and expect to be awarded other significant new civil awards in the third quarter. These already include the $270 million joint venture Kemano hydroelectric generating station second tunnel completion project in British Columbia, Canada for Frontier-Kemper; the $239 million joint venture I-35W bridge in Iowa and Minnesota for Lunda Construction; and the $44 million Route 3 widening project in Guam for Black Construction. In addition, we just learned yesterday that we are being awarded a large project in our Building Group for a -- without saying it, a technical owner on a plant in the Bay Area valued at nearly $500 million. Work on this project is expected to begin during the third quarter of this year. And it is a project that we have been silent on and have not spoken of previously because of the owner's dictates.

Now let me discuss some of the more significant projects that we executed work on during the second quarter. Our western Civil Group commenced its work on the Los Angeles MTA Purple Line Section 2 expansion project. Engineering is well underway and significant construction activities are expected to start during the first quarter of 2018. The Civil Group also continued its major work on various East Side Access projects in New York, with work on the CS179 and CM007 projects continuing to ramp up with CQ33 just getting underway, while CM006 and other smaller East Side Access projects approach completion. CM007 and CQ33 are $600 million-plus and $300 million. And CQ33 was awarded in the second quarter. All of these are for the New York Transit Authority. They should both contribute more significantly later this year and over the next 3 years. Other civil projects that are nearing completion were the Hudson Yards Platform, which after the recent award of additional scope is expected to be completed in the first quarter of 2018; and the SR99 project in Seattle, where we are working to complete the double-deck highway in the already completed tunnel by January of 2018, with the project being substantially complete and opening for traffic in the third quarter of '18. Finally, the California high-speed project again contributed notably to our results in the second quarter in both revenue and margin.

The Building segment's work in the second quarter included various significant projects, mainly in California and Florida, but some also in the Northeast and Southern U.S. Top revenue contributors for the group once again included a large technology office facility project in Northern California, that we're not supposed to say is Apple; the Pechanga Resort and Casino expansion in Southern California; the Panorama Tower in Miami; the Washington Hospital in Northern California; Maryland Live! Casino expansion and the W Hotel project in Philadelphia. We expect that our work on the large technology facility will begin to wind down in the second half of this year as we work toward completion by year-end. In addition, the Panorama Tower in Miami is still expected to be complete between the middle of December and the end of January.

Major revenue contributors for the Specialty Contractors segment in the second quarter included Five Star Electric's work on the C179 East Side Access, their share of the Hudson Yards Platform and Tower A at Hudson Yards for Related. And in addition, Fisk Electric's work on the Transbay Transit Center in San Francisco and other electrical projects in the Southern U.S. Demand for our Specialty group remains strong, especially in New York. And their workload is expected to grow concurrently with the elevated demand for our civil and building services.

We ended the second quarter with a total backlog of $7.6 billion, an increase of approximately $1.3 billion or 21% compared with the backlog at the end of the year, a result of the large volume of new awards booked through June of 2017. Our backlog at the end of the second quarter was 56% Civil, 24% Building and 20% Specialty, reflecting a continued shift toward higher-margin civil projects that should drive improved profitability with time. The 56% level is a new record high, proportionate for our Civil Group. And we continue to see a remarkable volume of prospective opportunities and bidding activities for our civil projects over the next several years. The strength of the underlying demand should support our long-term outlook for growth and profitability.

The Civil segment's new awards and adjustments totaled $847 million in the second quarter, resulting in a backlog of $4.2 billion at the end of the quarter, an all-time record high for the Civil segment. Significant awards included a $323 million I-74 Steel Twin Arch Bridge Replacement Project in Iowa; the $292 million CQ33 East Side Access project, which I mentioned earlier; $97 million of additional scope for the Hudson Yards Platform; the $82 million Henry Hudson Bridge design-build project in New York City; and the $78 million Maryland MD 4 interchange project.

The Civil segment's opportunities continued to include many large projects, such as the $2.3 billion Long Island Rail Road third track, which bids this week; the $1.5 billion to $2 billion Newark Airport Terminal A, which bids the first week of November; the $900 million Southwest Light Rail Transit project in Minneapolis, which bids mid-August; the $750 million Harry Nice Bridge replacement in Maryland bidding in 2018; the $700 million Portal Bridge replacement in New Jersey, again in 2018; and many more significant major projects that continue to come forth. If that were not enough, we have been awarded over $200 million in new work this year in Guam at our Black operating subsidiary with over $700 million in bids tendered to the Navy for more facilities on Guam waiting an answer on all of that work over the next 60 to 90 days.

The Building segment's second quarter new awards and adjustments were $551 million, resulting in a backlog of $1.8 billion at the end of the quarter as compared to the backlog at the end of the prior quarter. The segment's significant new awards, including 2 health care projects in California collectively worth $154 million, additional scope valued at $97 million for our favorite Bay Area project and a mixed-use project in California worth $53 million.

The Building segment's bid opportunities include $7 billion of prospects across California, including the $800 million One Beverly Hills project, where we had been told will be informed by tomorrow whether or not we will be awarded or not on a project that only had 2 proposals; a $700 million cultural arts facility in Los Angeles; $2 billion of projects in South Florida, including the $600 million Estates at Acqualina development; and several projects in Las Vegas, including the $1 billion Las Vegas Convention Center expansion; and approximately $500 million of Wynn hospitality and gaming projects; as well as an equal amount of $500 million at Caesars east side convention center expansion.

The Specialty Contractors segment booked new awards and adjustments totaling $239 million in the second quarter, which resulted in a backlog of $1.5 million (sic) [$1.5 billion] at the end of the quarter. We continue to see a high volume of bidding opportunities associated with various electrical and mechanical projects throughout New York, Texas, California and Florida.

Based on our results to date as well as our current backlog and other recent unexpected awards, we are reaffirming our guidance for 2017, where we expect revenue to be in excess of $5.5 billion and diluted earnings per share in the range of $2.10 to $2.40.

With that, I'll turn the call over to Gary Smalley, our CFO, to review the financial details of the second quarter.

Thank you, Ron. Good afternoon, everyone. Our second quarter revenue was $1.2 billion, essentially level with the same quarter of last year. Civil segment revenue was $473 million, also level year-over-year.

Building segment revenue was $493 million, down 6% compared to the same quarter of last year, predominantly driven by reduced project execution activities and a biotech project and a courthouse project both in California that are nearing completion. The decrease was partially offset by increased activity on various building projects, mostly in California, including the hospitality and gaming project and the large technology office project we have previously mentioned.

Revenue for the Specialty Contractors segment was $282 million, a decrease of 12% compared to the prior year quarter, mostly due to reduced project execution activities on various electrical projects in New York as certain projects have completed or are nearing completion and newer projects have yet to fully ramp up.

G&A expense for the second quarter was $69 million, up 13% compared to the prior year second quarter. The current year quarter saw higher compensation expense and business development costs.

Second quarter operating income was $34 million compared to $49 million for the same quarter in 2016. The decrease was due to the unfavorable adjustments that Ron mentioned for certain completing New York mechanical projects as a result of the project closeout activities and related negotiations.

Second quarter segment operating margins were 12.3%, 1.2% and a negative 5% for the Civil, Building and Specialty Contractors segments, in that order. Civil segment margin for the second quarter of 2017 was about 200 basis points higher than both the segment margin last quarter and last year's second quarter segment margin due to overall strong project execution.

Building segment margin for the second quarter was flat compared to last quarter, but lower when compared to the second quarter of 2016, primarily due to the reduced project execution activities I mentioned as well as contract closeout adjustments related to a project in California. We expect Building segment margins to improve modestly in the back half of the year.

Specialty Contractors segment margin declined significantly compared to the second quarter of last year, primarily due to the unfavorable adjustments that Ron mentioned earlier. We expect the segment's margin to improve in the back half of the year as well.

Interest expense for the second quarter was $22.5 million compared to $15.5 million for the same quarter of last year. The increase was almost entirely noncash and was related to the write-off of discount amortization, deferred fees and extinguishment costs for the April refinancing of our senior notes and credit facility.

Second quarter net income attributable to Tutor Perini was $30 million compared to $21 million for the second quarter of last year. The New York mechanical project write-downs were more than offset by the legal settlement and strong performance from our Civil segment.

Our second quarter diluted EPS was $0.59 compared to $0.43 in the second quarter of last year.

Let's shift gears now and discuss our balance sheet and operating cash. Our project working capital grew sequentially by 8% in the second quarter of 2017, primarily due to an increase in accounts receivable and a significant decrease in accounts payable resulting from reduced subcontractor payables, which was partially offset by an increase in billings in excess of costs associated with certain mass-transit projects in New York and California. Our unbilled cost, the costs and estimated earnings in excess of billings on our balance sheet, increased slightly in the second quarter.

As we experienced in the first quarter of this year, progress that we made during the second quarter in resolving certain unbilled cost issues was masked by increases in a handful of the previously existing unbilled cost positions with additional cost spent as the projects move closer toward completion. We still expect improved progress in reducing our total unbilled cost in the second half of the year as various claims and unapproved change orders continue to approach resolution. As we have discussed before, it is difficult to estimate with precision when certain unbilled positions will settle. For the more contentious items, the negotiations can become prolonged and sometimes lead to mediation, arbitration or even litigation. Sometimes we have to be very close to a trial date or even on the proverbial courthouse steps before we get what we believe is a fair or reasonable offer. Regardless of what form the resolutions will eventually take, we remain confident of our ability to collect that which is on our balance sheet and that which we feel is rightfully ours. Collecting our unbilleds remains a top priority of the company. The focus begins with Ron and is driven throughout the organization. So look for more progress in this area as the rest of the year unfolds and as we move into 2018.

We used $2 million of operating cash in the second quarter of 2017 compared to a use of $11 million in the same quarter of last year. This improvement resulted in spite of the significant paydown of payables, in part due to improved cash collections and the previously mentioned $37 million legal settlement. After the second quarter reduction of accounts payable and with the ramp-up of certain projects and expected reduction of cost in excess of billings in the second half of the year, which will drive an increase in our operating cash flow, we believe that we are now well positioned to show strong operating cash performance for the rest of this year. Keep in mind that just as our earnings are back end loaded every year due to normal cyclicality, operating cash flow generation is as well. Therefore, look for improvement in earnings and operating cash flow for the next 2 quarters.

Our total debt as of June 30, 2017, was $863 million, with our second quarter leverage ratio at 2.79, which is well below our bank covenant that requires us to be under 4.

Finally, I will provide an update to our guidance-related assumptions. We're now forecasting interest expense for 2017 to be $68 million. Of the $68 million projected, $18 million will be noncash. We expect an interest expense reduction of between $8 million and $10 million in 2018 as a result of the refinancing we completed in April. Our forecast of $50 million for depreciation and amortization expense in 2017 remains unchanged. We are still forecasting approximately $15 million of capital expenditures for 2017, which excludes the potential purchase of new equipment for significant new projects, which will be paid for by the projects. We expect our effective tax rate to be within a range of 38% to 39% for 2017.

With that, Ron, I'll turn the call back over to you.

Thanks, Gary. While the quarter did not generate earnings as well as we believed, we still anticipate achieving our guidance for the year. Our growing backlog and continued success in winning 2 projects reflects the underlying strength of our business. Just the projects we are currently bidding or are awaiting results in translates to over $4 billion worth of work that we'll know by Thanksgiving of this year as well as $600 million in bids sitting with the Navy in Guam. So we believe we are sitting on a potential for the biggest backlog this company has ever seen, and this before looking at any of the benefits that we anticipate coming from any of the federal funding of continued infrastructure, California's transportation bill, Proposition M in Los Angeles and all the other large voter-approved transportation funding measures, none of which have hit the marketplace yet. We like our outlook for growth and profitability in the years ahead.

And with that, I'll turn the call back over to the operator for questions and answers. Thank you.

(Operator Instructions) Our first question comes from Steven Fisher with UBS.

Can you guys just clarify how many of your challenging projects in the quarter are still ongoing?

I'd say of the major write-downs, they're all closeouts and settlements with owners. And the only things that are challenging that are still ongoing is the completion of SR99 in the State of Washington, namely the tunnel, and the completion of CM006 for the New York Transit Authority, which is probably at 95%-plus in the final stages of negotiation. Those are the 2 largest that are still open. The rest of them are major closeouts that, as far as I can recall, would cover your question.

Okay. And do you have a sense of how much cash drag there could be from the remaining time on those other 2 projects?

I don't think CM006 will have anymore. If it was, it'd be $5 million or less. The tunnel job could be up to at the joint venture level another $30 million, $40 million, of which 45% would be ours.

Okay. And then the revenues were a fair bit lighter than our estimate and the consensus. How did the revenues compare to your plan? Was there any delay in certain projects that slowed the revenue burn or kind of was this about what you expected? Because I guess for the back half of the year you're implying $1.6 billion -- more than $1.6 billion per quarter. And I'm just trying to make sure that, that's all what you have in backlog. I mean, you listed a number of projects, just want to gauge your confidence on that.

I'll speak to high-speed rail, which probably contributed over $100 million of the delayed revenue. We found ourselves stopped by both Caltrans, the City of Fresno and a couple of districts that we had to fight through who have finally released the areas of work for us to go to work. And that should release us to begin to achieve the revenues we expected on high-speed rail. You may want to comment, Gary, on where else it might be appropriate.

Yes. Overall, Steve, we are pretty close to what our budget was so we feel good with the remaining half of the year without getting into project-by-project specific. We are very close to what the budget was for both quarters and then, therefore, in the aggregate.

Okay. And then maybe just last, going back to cash flow. And previously, you were expecting about $200 million of work down of your unbilleds. I didn't hear you kind of put forth a new figure on that. I guess, can you kind of frame that for us? And then just talk about the confidence you have in cash flow turning positive in the second half of the year.

We think we've collected in order of magnitude, give or take, a few million of in excess of $70 million of the unbilleds we projected. Unfortunately, some of these projects that are not done have absorbed some part of it. We feel confident or at least very good about collecting the balance of $130 million or more the next 6 months. If not the next 6 months, but were still due, is continue to the last -- into the first quarter next year. One of our biggest unbilled receivables was on SR99 that we're supposed to litigate, which was a major multi-hundred million claim against an insurance carrier. And they managed to stall the litigation another year. So that means as insurance companies do, they don't pay until you're on the courthouse steps. Or if their heart is with them, let them try the case, but it put it back over a year. And the rest is just stalled in negotiations and back and forth. But keep in mind our confidence is borne of a history of always collecting what we expect. And if we don't, we litigate. And as we tell our owners, it's very seldom that we lose any litigations. If that's what they want, we're the best one to give it to them.

Our next question comes from Sean Eastman with KeyBanc.

First, I just wanted to dig into the top line guidance a little bit more. I know there's a lot of moving parts in there, a lot of projects and different segment outlooks. So I just wanted to get a sense for what you guys are assuming in terms of top line growth for each segment to hit that $5.5 billion-plus for this year.

Gary?

Yes, Sean, we don't break it out by segment on -- in any public way. Our budget, of course, does. But I think if you -- to give you a ballpark, if you -- you know what the distribution of backlog is and you also know what the burn has been through the first 6 months of the year, and I think you can get pretty close with those numbers to see where we expect the revenue to be coming from. In other words, more and more is coming from civil.

Okay. That makes sense. And then just looking at the Civil margin performance this quarter, it was really strong, much stronger than we were modeling. And just wondering if there's any kind of favorable closeouts in there or any mix nuances we should consider going forward or if we're just kind of seeing some solid pricing starting to flow through.

We think in all the new work, we're achieving higher margins than we previously have. For example, the Los Angeles subway project, we achieved a significantly higher-than-normal margin. We think it's an excellent job. We think our bidding margins, we're bidding at significantly higher than we were this time last year. And there's so few opportunities and once again so few of us that these major projects become like buses. You miss one, there's always another one right behind it. So we think that the Civil margins will continue to trend up, particularly in the Midwest and the Western U.S. New York is still competitive. But even New York, when it gets up into $1 billion-plus, it becomes a different marketplace. So we still think there's more room to trend up on the Civil side and we're banking on it.

There are no -- to one of your questions, there were no project closeout adjustments which helped the margins. It's all solid performance, as Ron was saying.

Okay. That's great. And then just one last one for me, just higher level. We saw this quarter that one of Tutor Perini's competitors was acquired, one of your California competitors. And the company that acquired them talks a lot about this integrated delivery model and how it's helping them get a competitive advantage in civil. And I just wanted to get your thoughts on what you think of that trend and where you think TPC fits into that competitive dynamic.

Well, personally, we think the world of AECOM. I think they're an outstanding consulting engineer. I don't agree with them that consulting engineers and general contractors mix. I don't think we think alike. I don't think we act alike. I think our risk-reward issues are totally dissimilar. If Mr. Burke is ever to integrate in the construction successfully, he'll be the first design engineer that ever did it. And I wish him the best. As far as the company he bought, they're not even 1/10 of our size or 1/20 of our size. They're a very good local California civil works contractor. And we'll see what they can do with it. I don't believe that's a trend or anything we'll ever consider.

Our next question comes from Brent Thielman with D.A. Davidson.

Just a follow-up on the Civil margins. With some of the new work you picked up in that segment and assuming you're going to get -- start to ramp up in the second half, any reason to think that'd be dilutive to the 10.8% you put up just given the mix in new jobs or something like that?

I didn't understand the question, Brent. Could you try it again?

Well, I just said, Ron, some of the new work you've picked up, new awards you've gotten in the Civil segment, any reason as that ramps up in the second half that might be a little bit dilutive to what you just put up in that segment on the margin side?

Oh, you mean it could reduce the margins?

Yes.

No. I think I said earlier that just about everything we're bidding and adding in backlog is at increased margins from what we did a year ago. And I think that's a position we're going to be fairly consistent across the country. There is just way more civil work than there are general contractors capable of doing them, particularly in the $1 billion-plus category, where we never find ourself bidding against more than 2 other contractors. And it just -- there's just too much to lower margins. If anything, it's an opportunity to get reasonable margins for the first time in some time.

Okay. And then on the Building segment, kind of running through the list you gave at the beginning of the call, it seems like there's a few more opportunities in the pipeline than maybe where we did a quarter or 2 ago. I mean, are you more optimistic about that business now than a couple of quarters ago? Do you feel like you can grow that group backlog by year-end?

Well, let's put it this way. I'm waiting right now. I think we just announced that we received notice of an award for just under $500 million yesterday in the Building segment. I said we expect to hear today or tomorrow on another $800 million in Beverly Hills and probably next month on another $500 million in Las Vegas. So with any good fortune at all that, that Building backlog could significantly increase virtually overnight. So yes, there's no question with the changes we made and the path we're going on, on the Building end, that should significantly increase in annual revenue and backlog. However, I'll remind everybody, at best, it's a low-margin business.

Understood. Okay. And then just on -- back on Specialty, the -- I guess the new work you're picking up or what you see in the pipeline out there, do you still feel confident about getting kind of that business kind of to 5% or higher target margin range?

Well, yes. And it took getting through a number of bad jobs that we ended up closing out from prior regimes who have been terminated, to put it bluntly. And we think the worst was behind this last quarter, but then we faced other jobs that I simply thought we had to write down, and we did. And I'm assuming that all the negatives will wear out, if not now, by no later than next quarter. And most of the old work that had the up-and-down margins and inconsistencies are finished. And we're into much newer work, much of which is with the parent company, Tutor Perini, which was always our strategy, higher margin, better costs and more controlled environments where we control the direction of the job. Yes, I think we'll get Civil back to that 5%. And it's certainly our plan and belief that it will be in 2018. Although with the abysmal second quarter, I don't think we'll achieve it in '17. I would expect it in '18.

(Operator Instructions) Our next question comes from Nick Chen with Alembic Global Advisors.

Ron, impressive growth in the Civil backlog this quarter. I'm just wondering how much more work can you take on there before you start to hit capacity constraints?

That's a good question. There have been 2 of our senior executives we asked. While we're turning in over $2 billion this week and another $800 million next week, and we've got $700 million with the Navy already in, my sense is we could take on another $2.5 billion to $3 billion of backlog. And remember, they're in joint ventures. So that's not us acting alone. We're the managing partner and majority holder. I'd say 3 to 4 more major civil jobs even at these kinds of significant margins are such we'd really have to question and be careful of where we went from there because it impacts our capacity. And of course, that level of backlog would have a major impact on annual revenue and profitability. But we do have a limit. And I think we've set for ourselves a growth limit of adding $1 billion a year or thereabouts over the next 2 to 3 years is something achievable and sensible given the physical constraints of our own people. So that's a moving target all the time, and a lot of it depends on the job, its complexity, its risk and the talent numbers of people we have to commit. But all verbiage aside, you're right to believe that at some point, no matter what our financial capacity is, we stop bidding or we begin to take secondary positions in joint ventures that are sponsored by our friends and junior partners where they take the lead and we take a secondary position and they manage the joint venture supported by our knowledge and expertise. So there's more than one way to skin a cat. But with the volume of work bidding and already in, there is a point -- I may be vague because I'm not certain what it is because we discuss capacity issues every day.

Got it. That's very helpful. And then just looking back to some of the commentary from Q1, I think you guys had about $0.05 of EPS headwind from wet weather in California. Looking past the high-speed rail delays, which don't seem like they were weather-related, how was Q2 looking there? And are you expecting to still recoup that $0.05 from the California projects in the second half of '17?

The California High-Speed Rail project has been a very successful project, not only in our eyes, but in the owners. The only struggles there have been the constant delays by right-of-way procurement and owner issues with third parties. They constantly limit what we can do. But we seem to finally be getting that behind us and the job is opening up. And we see ourself getting much of the work done over the next 12 months as it opens up. So that means significant revenue as our contract prices increase substantially also.

At this time, I would like to turn the call back over to Mr. Ronald Tutor for closing comments.

Thank you, everyone, for our quarterly call. Always a pleasure answering your questions. Till the next time. Thank you.

This concludes today's teleconference. You may disconnect your lines at this time and have a great day.