MYR Group Q1 2024 Earnings Call Transcript

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Provided by Quartr
May 2, 2024

There are 11 speakers on the call.

Operator

Good morning, everyone, and welcome to the MYR Group First Quarter 2024 Earnings Results Conference Call. Today's conference is being recorded. At this time, for opening remarks and introductions, I would like to turn the conference over to David Gutierrez of Dresner Corporate Services. Please go ahead, David.

Speaker 1

Thank you, and good morning, everyone. I'd like to welcome you to the MYR Group conference call discuss the company's Q1 results for 2024, which were reported yesterday. Joining us on today's call are Rick Schwartz, President and Chief Executive Officer Kelly Huntington, Senior Vice President and Chief Financial Officer Brian Stern, Senior Vice President and Chief Operating Officer of MYR Group's Transmission and Distribution segment and Don Egan, Senior Vice President and Chief Operating Officer of MYR Group's Commercial and Industrial segment. If you did not receive yesterday's press release, please contact Dresner Corporate Services at 312 726-3600 and we will send you a copy or go to the MYR Group website where a copy is available under the Investor Relations tab. Also, a webcast replay of today's call will be available for 7 days on the Investors page of the MYR Group website at myrgroupdot com.

Speaker 1

Before we begin, I want to remind you that this discussion may contain forward looking statements. Any such statements are based upon information available to MYR Group's management as of this date, and MYR Group assumes no obligation to update any such forward looking statements. These forward looking statements involve risks and uncertainties that could cause actual results to differ materially from the forward looking statements. Accordingly, these statements are no guarantee of future performance. These risks and uncertainties are discussed in the company's annual report on Form 10 ks for the year ended December 31, 2023, the company's quarterly report on Form 10 Q for the Q1 of 2024 and in yesterday's press release.

Speaker 1

Certain non GAAP financial information will be discussed on the call today. A reconciliation of these non GAAP measures to the most comparable GAAP measures is set forth in yesterday's press release. With that said, let me turn the call over to Rick Schwartz.

Speaker 2

Thanks, David. Good morning, everyone. Welcome to our Q1 2024 conference call to discuss financial and operational results. I will begin by providing a summary of the Q1 results and then will turn the call over to Kelly Huntington, our Chief Financial Officer, for a more detailed financial review. Following Kelly's overview, Brian Stern and Don Egan, Chief Operating Officers for our T and D and C and I segments, will provide a summary of our segment's performance and discuss some of MYR Group's opportunities going forward.

Speaker 2

I will then conclude today's call with some closing remarks and open the call up for your questions. Our strong market position, operational consistency and the strength of our long term customer relationships resulted in steady first quarter performance. Bidding activity remains healthy across both our business segments as we seek to strategically capture new opportunities and stay true to our sound business principles. The country's growing need for an investment in a more robust electrical infrastructure, along with the continued shift to clean energy sources, present ongoing opportunities for growth for our T and D segment. The Deloitte Research Center for Energy and Industrial's report from 2023 estimates up to $350,000,000,000 in spending towards transmission infrastructure investments through 2,030, with an additional forecast of up to $580,000,000,000 in distribution infrastructure investments over the same timeframe.

Speaker 2

These markets are traditional strengths for our T and D segment where we are well positioned for success. Much of our growing demand for electricity across the U. S. And Canada is fueled by the core markets our CNA segment serves. Data centers and the advancement of artificial intelligence, transportation, manufacturing and healthcare facilities are some of the expanding markets driving the need for electrification now and into the future.

Speaker 2

Our teams have the experience and relationships to continue pursuing and winning work in these chosen core markets. As always, our success is grounded in an unwavering commitment to our customers, safe and reliable project execution and the talent and dedication of our team members. We continue to develop and empower our employees to reach their highest potential as we grow our company. And I thank each of them for their efforts. Now Kelly will provide details on our Q1 2024 financial results.

Speaker 3

Thank you, Rick, and good morning, everyone. Our Q1 2024 revenues were $816,000,000 which represents an increase of $4,000,000 or 0.5% compared to the same period last year. Our Q1 T and D revenues were $490,000,000 an increase of 10% compared to the same period last year. The breakdown of TNT revenues was $314,000,000 for transmission and $176,000,000 for distribution. T and D segment revenues increased $29,000,000 on distribution projects and $16,000,000 on transmission projects.

Speaker 3

Work performed under master service agreements continued to represent approximately 50% of our T and V revenues. C and I revenues were $325,000,000 a decrease of 11% compared to the same period last year. The C and I segment revenues primarily decreased due to the delayed start of certain projects that are expected to begin later in 2024. Our gross margin was 10.6 percent for the Q1 of 2024 compared to 10.4% for the same period last year. The increase in gross margin was primarily due to better than anticipated productivity, favorable joint venture results, favorable change orders and a favorable job closeout.

Speaker 3

These margin improvements were partially offset by labor and project inefficiencies, some of which were caused by inclement weather experienced on certain projects, rising costs associated with supply chain disruptions and unfavorable change order and an unfavorable job closeout. T and D operating income margin was 6 0.1% for the Q1 of 2024 compared to 7.4% for the same period last year. The decrease was primarily due to labor and project inefficiencies, most of which related to clean energy projects, primarily in one geographic area that also experienced inclement weather, as well as higher fleet depreciation and maintenance expenses and an unfavorable change order. These decreases were partially offset by better than anticipated productivity and an increase in work in progress. C and I operating income margin was 3.5% for the Q1 of 2024 compared to 2.9% for the same period last year.

Speaker 3

The increase was primarily due to better than anticipated productivity, some of which related to clean energy projects, favorable joint venture results, favorable change orders and a favorable job closeout. These increases were partially offset by labor and project inefficiencies, some of which were caused by supply chain disruptions. C and I operating income margin was also negatively impacted by a decrease in work in progress, higher contingent compensation expense related to a prior acquisition, an unfavorable change order and higher fleet depreciation and maintenance expenses. Q1 2024 SG and A expenses were $62,000,000 an increase of $5,000,000 compared to the same period last year. The increase was primarily due to an increase in employee related expenses, an increase in contingent compensation expense related to a prior acquisition and an increase in employee incentive compensation costs.

Speaker 3

1st quarter 2024 interest expense was $1,000,000 an increase of $500,000 compared to the same period last year. The increase was due to higher average outstanding debt balances and higher interest rates. 1st quarter 2024 net income was $19,000,000 compared to $23,000,000 for the same period last year. Net income per diluted share of $1.12 decreased compared to $1.38 for the same period last year. Q1 2024 EBITDA was $40,000,000 compared to $41,000,000 for the same period last year.

Speaker 3

Total backlog as of March 31, 2024 was $2,430,000,000 9% lower than a year ago. Total backlog as of March 31, 2024 consisted of $853,000,000 for our T and D segment and $1,570,000,000 for our C and I segment. Q1 2024 operating cash flow was $8,000,000 compared to operating cash flow of $37,000,000 for the same period last year. The decrease in cash provided by operating activities was primarily due to the timing of billings and payments as well as an increase in our days sales outstanding as compared to the prior year. Q1 2024 free cash flow was negative $18,000,000 compared to positive free cash flow of $18,000,000 for the same period last year, reflecting the decrease in operating cash flow and higher capital expenditures.

Speaker 3

Moving to liquidity and our balance sheet. We had approximately $294,000,000 of working capital, dollars 38,000,000 of funded debt and $434,000,000 in borrowing availability under our credit facility as of March 31, 2024. We have continued to maintain a strong funded debt to EBITDA leverage ratio of 0.2x as of March 31, 2024. We believe that our credit facility, strong balance sheet and future cash flow from operations will enable us to meet our working capital needs, support the organic growth of our business, pursue acquisitions and opportunistically repurchase shares. I'll now turn the call over to Brian Stern, who will provide an overview of our Transmission and Distribution segment.

Speaker 4

Thanks, Kelly, and good morning, everyone. Within the T and D segment, we remain focused on strategically pursuing new opportunities, expanding long term customer relationships through master service agreements and continuing to maintain and expand our long term client relationships. Bidding activity shows positive signs of growth with increased opportunities for various sized projects that we continue to monitor and selectively pursue. Solar market headwinds persisted into 2024 and the same group of projects continued to negatively impact our financial results in the Q1. We continue to work closely with our clients and project teams and anticipate reaching substantial completion on this group of projects during the Q3.

Speaker 4

Forecast for capital spending on aging infrastructure, reliability and energy transition projects remain strong, with spending expected to grow at record levels over the next decade, according to S&P Global's industry and credit outlook for 2024 released in April. Increasing electrification demand emphasizes the need for system hardening, upgrades and new transmission and distribution infrastructure. In the Deloitte report mentioned earlier, respondents cited upgrading and expanding grid infrastructure as their biggest challenge, creating future opportunities for our business. Our traditional D and D operations continued their strong execution of work throughout our operating territories. We continue to focus on our long term MSA customers and supporting their needs.

Speaker 4

This is evident by a recent renewal of an existing alliance in our Western operations and the award of an exciting new MSA for major utility in the Midwest. Additionally, substation, transmission and distribution work remains active across the country with numerous subsidiaries being awarded projects. To conclude, our consistent focus on safety and project execution has enabled us to expand our customer relationships while strategically pursuing new opportunities. We strive to leverage our capabilities and experienced teams across our companies to contribute to our customer success and overcome challenges together. We are excited about the outlook for the T and who will provide an overview of our Commercial and Industrial segment.

Speaker 5

Thanks, Brian, and good morning, everyone. Our C and I results in the Q1 improved from previous quarters and demonstrate the strength of our core markets we serve. Our C and I segment continues to overcome challenges as we capture and execute new projects through extensive collaboration with our clients and vendors and by leveraging our strong supplier network across the organization. Pitting activity remains healthy in our chosen core markets with continued signs of long term stability. According to the 2024 North American Engineering and Construction Outlook released in April, forecast for growth in engineering and construction spending remains strong across all non residential segments.

Speaker 5

The report predicts continued positive growth rates in high performing markets such as healthcare, transportation and manufacturing, all of which are core markets for our C and I segment. These encouraging forecasts could generate growth for our business as we continue to leverage our expertise and to place us in a leading position to strategically capture future opportunities in these markets. Across the U. S. And Canada, our companies continue to perform and pursue an array of projects.

Speaker 5

Data centers remain strong with recent awards as well as new opportunities in Arizona, Colorado, Chicago and California. Transportation also remains strong as we pursue new opportunities with transit work in Canada by Western Pacific Enterprises and we see increased opportunities for additional transportation work in Colorado and California. Aerospace is another market with opportunities and recent awards for CSI Electrical Contractors in California, Hewn Electric in Chicago and Sturgeon Electric in Colorado. We also continue to see new opportunities in solar, warehousing and water treatment facilities, which are strong core markets for our C and I segment. In summary, we are proud of our employees for their creative thinking, dedication and strong customer relationships as they continue to navigate the ever changing landscape of the industry.

Speaker 5

These attributes enable us to mitigate the day to day challenges and continue to execute our projects while maintaining a healthy pipeline of work, enhancing our potential for continued growth. Thanks everyone for your time today. I will now turn the call back to Rick, who will provide us with some closing comments.

Speaker 2

Thank you for those updates, Kelly, Brian and Don. Our Q1 performance reflects our ongoing commitment to strong operating principles and sound business strategies, while remaining proactive and disciplined in a dynamic energy landscape. We continue to expand long term customer relationships and remain focused on creating value through safe and quality project execution. Thanks to the tireless efforts of our talented employees, MYR Group is strongly positioned as an industry leader that is viewed as an essential partner by our customers. I believe 2024 represents a great opportunity for MYR Group to build upon our success.

Speaker 2

I thank each of you for your ongoing commitment and support to the success of this organization. And I look forward to working with you to advance our vision and realize our business goals. Operator, we are now ready to open the call up for comments and questions.

Operator

Thank And the first question comes from the line of Ati Modak from Goldman Sachs. Please go ahead. Your line is now open.

Speaker 6

Hi, good morning team. Just you are among the few players that have a unique exposure to data centers, so both from a direct and indirect exposure perspective. So curious about your views here. From your vantage point on where you are seeing customer conversations progress today, when do you think the volume of work really starts to inflect in the backlog, again, both for direct and indirect exposure? And what are the challenges, maybe supply chain or others that you might have to navigate, if any?

Speaker 2

I'll start and then I'll let Don add. I think it's a very active market for us, but we're very selective in what we approach. I think anybody can over commit in this data center market today. So for us, it's being very selective with the resources we have, the customers we have and then being aware of the supply chain. Right now, it's really the longer lead items that we're seeing as an issue out there and I think our clients are addressing it and, coming to us sooner and sooner, with future opportunities so they can prepare for that.

Speaker 2

Don, I'll let you talk about some of the opportunities out there.

Speaker 5

I think you really nailed it, Rick. We need to be extremely selective in the pursuits that we're chasing. We can get over committed, which is a big concern pursuits that we're chasing. We can get over committed, which is a big concern of ours, while we continue to monitor what's happening on the supply chain. As far as when we may see an increase in our backlog, we've talked about it before, backlog can be very clunky, but the reality is sometimes we may have a small amount of backlog we're adding so we can get some of that long lead equipment ordered early.

Speaker 5

But really ultimately we're really focused on our existing clients and what their builds are looking like in the future.

Speaker 6

Got it. Thank you for that. And then you spoke about expanding alliance agreements and strategically capturing new opportunities. Is that additional market share? Can you give some color around that on the opportunities that you're seeing and how we should think about the margin impact from that?

Speaker 2

Sure. For us, it's steady opportunities to continue and grow and expand our business. Those are new market opportunities that Brian covered. And for us, it's just additive to what we do and it's just part of our steady growth profile long term.

Speaker 6

Got it. Appreciate that. I'll turn it over.

Operator

Thank you. We will now take our next question. Please stand by. And the next question comes from the line of Brian Brophy from Stifel. Please go ahead.

Operator

Your line is now open.

Speaker 7

Yes, thanks. Good morning, everybody. I think last quarter you talked about expectations for high single digit growth for the year in both segments. Just curious now that we're through the Q1, how things are shaking up relative to that initial expectation? Are you still expecting high single digit growth in both segments this year?

Speaker 7

Thanks.

Speaker 2

For us, I would say it's a little bit of on the C and I side, it's the push out of some of the projects we saw. We anticipated some projects starting in the Q1 and into the Q2. We've seen those push out to the Q4. So it's not the projects were canceled or anything for a myriad of issues. They were really pushed out.

Speaker 2

So I think that'll be more of a flattish profile for our company this year, than kind of that higher single digit growth, but great opportunities going forward in both our segments. So that's really where we see that heading right now. But again, just a push out of those projects, not anything that's detrimental or we're not seeing a big slowing of anything. As I identified last quarter on the T and D side, we are seeing some of the larger clean energy or solar projects getting very competitive. We saw that continue this quarter.

Speaker 2

So again, we're not going to take projects below where we feel our cost is or our cost with a fair markup is. We see it as a great long term market, but very competitive at this point.

Speaker 7

Great. That's really helpful. And then could you talk about margin progression that you're expecting for the remainder of the year? I guess, in both segments seem to expecting kind of an inflection here in the back half as some projects roll off. Just curious if you're still expecting that and how we should be thinking about margin progression for the year?

Speaker 8

Yes. I'll start with the

Speaker 2

DNI side. I think go ahead, Kelly.

Speaker 3

Thanks, Rick. I'll just jump in and say, I think from the C and I side, we're pleased to see some improvement from the 4th quarter at the 3.5% margin this quarter. We still see the same trajectory that we talked about on the last call with getting to the low end of our target operating income margin range of that 4% to 6% at midyear on a run rate basis. And so I think we've demonstrated some good progress there this quarter. So expecting probably something pretty similar as we go to Q2 and then seeing continued gradual improvement from there.

Speaker 3

On the T and D side, as was mentioned in Brian's remarks, it really comes back to the same set of projects that we talked about on the last couple of calls that have been bringing our operating income margins down there. We do continue to see that we'll be wrapping up field labor on those projects at the beginning of Q3. And so as a result, we'd expect to see since we're carrying those projects at lower margins, but that will continue to affect us in the Q2. But then we should start to see margin improvement in the second half of the year trending back towards that target range of the 7% to 10.5% going forward. Of course, all of that is particularly on the T and D side is weather dependent.

Speaker 3

We always consider normal weather there. But hopefully, that gives you a sense of where we're headed, a very similar story to what we talked about on the last call.

Speaker 7

That's very helpful. Thank you. I'll pass it on.

Operator

Thank you. We will now take our next question. Please stand by. And the next question comes from the line of Sanjita Jain from KeyBanc Capital Markets. Please go ahead.

Operator

Your line is now open.

Speaker 9

Yes. Hi, good morning. Thanks for taking my question. So Kelly or Rick, can you tell us a little bit more about the delayed projects there? What type of projects they are?

Speaker 9

The geography maybe and what may be causing the delay in start?

Operator

As I said, it was kind

Speaker 6

of a myriad of issues on

Speaker 2

the and it's on the C and I side and it's not on one specific type of work. I would say it affected us on a couple of different sides of work and it was anything from a permitting or owner furnished material coming in. So it was just push out on that side. But again, nothing that's canceling the projects and we see them starting kind of in that 3rd Q4 rather than the 1st and second quarter of this year.

Speaker 9

Got it. Thanks. And on if I can ask a question on the higher SG and A, was that a function of maybe some closeouts earn outs that you had to pay on some acquisitions? And if so, should we be modeling it the same way going forward?

Speaker 3

Yes, I can address that. So that was a part of the variance when we look at year over year and it does come from higher profitability from prior acquisition and some contingent compensation expense related to that. And we did see some strong favorable closeouts during the quarter. So that was it was a significant driver of the increase in SG and A expense, especially when you look year over year.

Speaker 9

How should we think about that going forward? Do you expect to have more of these payments for the rest of the year or does that taper down?

Speaker 3

So that could continue to be a factor in the second quarter, but I would expect that that would not be a material factor as we go into the second half of the year.

Speaker 9

Got it. Thank you so much.

Operator

Thank you. We will now take our next question. Please stand by. And the next question comes from the line of Justin Hauke from Baird. Please go ahead.

Operator

Your line is now open.

Speaker 8

Hi, good morning. So I guess I just wanted to circle back on the solar projects. Obviously, that's not new and your timing saying they're going to be done sometime in the 3rd quarter is kind of what was the expectation before. I guess just for thinking about the margins and how those roll off. I mean approximately how much revenue are those projects generating?

Speaker 8

And then are you still with the gross margin adjustments that you made on them, are they still earning a profit? Or is that basically running at 0 margin at this point? And I'm just trying to understand the magnitude of how that drag could reverse once those are complete?

Operator

Yes, Justin, I would point Sorry, Rick, go ahead.

Speaker 2

I was going to say those projects are difficult projects for us that handful. We're getting them behind us. They are very, very low margin projects for us. So they are slightly negative for us on that side. So they are pulling us down.

Speaker 2

Weather continues to be an impact on those projects. And as I said, they'll be finished during that beginning of Q3 timeframe. So for us, we really haven't disclosed what the revenue was on those projects and we're in discussions with our clients and they don't want to say much about those projects. So that's about as deep as I can get into it.

Speaker 8

Okay. I mean Yes. And I would just point

Speaker 3

to some of the disclosures that we have in the 10 Q that just provide a little bit more background on that 6.1% margin we had in the quarter and some of the puts and takes from that perspective that gives a little bit more detail.

Speaker 8

Yes. No, I saw the 250 basis points net. I was just kind of trying to understand, I mean, is this 10% of the T and D business? Is it 5%? I mean, just kind of directionally on that because that kind of helps understand like once those roll off, what it would be considering that they're running at very low margin or negative margin?

Operator

I don't know if there's anything to add on. No,

Speaker 2

I would say it would take us more towards our mid range of our guidance of where we should be at somewhere in their lower to mid range without those projects. Okay.

Speaker 8

I guess my second question just maybe bigger picture. Your distribution revenue is actually up pretty strongly, up 20%. I guess we've heard some commentary that the utilities have been pulling back work under their MSAs, maybe it's shifted to more transmission or they're restricting hours just to make sure that they don't kind of run over their CapEx budgets for the year. But years was up nicely. So I guess, are you seeing that or what are your customers saying in terms of, kind of their progression of how they plan to roll out under your MSA contracts for the year?

Speaker 2

Justin, I think when we look at it, we've always said between whether it's transmission or distribution, our MSAs are a lot of them are dual purpose and we do both transmission and distribution work for the same clients. So it's really how they roll out their work during that quarter. And for us, margin profile is very similar. We don't care which one we do. So it's just being able to support our clients.

Speaker 2

So again, it could it can always shift quarter to quarter based on the work they're releasing us. But I don't think we've got anything that that specific that says they're going to shift. And again, we only report 90 days of backlog in our MSA. So we're forecasting what we see for the next 90 days. We're not forecasting that out a year, but our clients aren't pulling back overall.

Speaker 2

We haven't seen that. So again, good spend from them and I really don't care which bucket it goes into.

Speaker 8

Yes. Okay. Yes. No, and that's a fair point with the 90 days because that's different from how some of your peers report their backlog. So thank you very much.

Speaker 8

Appreciate it.

Operator

Thank you. The next question comes from the line of Jon Braatz from KCCA. Please go ahead. Your line is now open.

Speaker 5

Good morning, everyone.

Speaker 2

Good morning.

Speaker 8

Kelly, could you give us a

Speaker 10

little more detail on the gross margin impact from your I think it was a joint venture investment that you have and I think it contributed 60 basis point improvement. Can you give us a little more specifics on that?

Speaker 3

Sure. And that relates to a couple of joint venture projects that we're nearing the finish line on and have had some strong results. And so that contributed to a favorable effect on the C and I segment in the quarter.

Speaker 10

Okay. Anything going forward from those JVs?

Speaker 3

They're getting closer to the finish line. So, we're not quite finished with that. They're not fully closed out, but I would expect that this was a larger contribution that we saw in this quarter.

Speaker 10

Larger in the Q2? Did I hear that right? I'm sorry.

Speaker 3

No, larger in the Q1.

Speaker 10

Okay, okay, okay, fine. And Rick, sort of from a big picture standpoint, sort of as always, the utilities are facing a little bit higher cost of capital. And are you seeing any reluctance to go forward with some of their capital spending because of the higher cost. Any reason to think that maybe some projects could be pushed further out to the right?

Speaker 2

Nothing that we see as of now. I mean, you're always seeing that shift in our quarter or shorter term, maybe the next 9 months things can move around. But we are still in discussions with customers on projects that are well into the future and we haven't seen anybody say anything that they're going to delay any projects or not build them because of the cost of capital or anything like that.

Speaker 6

Okay. Okay. Thank you.

Operator

Thank you. As there are no further questions, I would now like to hand back to Rick Swartz for closing remarks.

Speaker 2

To conclude, on behalf of Kelly, Brian, Don and myself, I sincerely thank you for joining us on the call today. I don't have anything further and we look forward to working with you going forward and speaking with you again on our next conference call. Until then, stay safe.

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MYR Group Q1 2024
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