Tutor Perini Corporation
Q4 2020 Earnings Call Transcript

Published: 24 Feb 2021

[Operator:]

Good day, ladies and gentlemen and welcome to the Tutor Perini Corporation Fourth Quarter 2020 Earnings Conference Call. My name is Alex and I will be your coordinator for today. At this time, all participants are in a listen-only mode. Following management's prepared remarks, we will be opening the call for a question-and-answer session. As a reminder, this conference is being recorded for replay purposes. At this time, I will turn the conference over to your host for today Mr. Jorge Casado, Vice President of Investor Relations. Please proceed.

[Jorge Casado:]

Hello everyone and thank you joining us today. With us on the call are Ronald Tutor, Chairman and CEO; and Gary Smalley, Executive Vice President and CFO. Before discussing our results, I will remind everyone that during today's call, we will be making forward-looking statements which are based on management's current assessment of existing trends and information.

[Ronald Tutor:]

Thank you, Jorge. Good afternoon and thank you all for your participation. We had a very strong year in 2020. Our project teams navigated well through the challenges presented by COVID-19 and we worked effectively throughout the year both at our job sites, as well as our offices and in the case of home offices or work from home setting. Our financial results for 2020 were highlighted by $2.12 of earnings per share, which exceeded our guidance and we delivered record operating income and record operating cash flow, both of which were higher than in any year since the merger of Tutor, Saliba, and Perini in 2008. Most impressively, we achieved these great results despite significant negative impacts of COVID-19 that for many projects resulted from a lack of available manpower, or reduction in field labor productivity, other labor productivity and efficiency, and essentially delays to project scheduled and deferral of work because, at times, our projects were short as many as 20% to 30% of their workforce. Gary will detail all our financial results relating with COVID later. However, the incremental costs were estimated to be in excess of $50 million, much of which we're seeking to recover from our owners as the recoverable costs. Our revenue grew 20% year after -- year-over-year in 2020 with double-digit growth across all segments, and particularly, strong growth in excess of 20% in both civil and specialty. The growth was driven by substantial work we progressed on several large civil projects, including Minneapolis Southwest Light Rail, the Los Angeles MTA Purple Lines Sections 2 and 3, as well as Division 20 and Purple Line 3 tunnels, four contracts of which totaled virtually $4 billion and the Newark Airport Terminal 1 for the Port Authority in New Jersey, as well as one large building projects such as the Choctaw Casino and Resort in Oklahoma. Another large unnamed hospitality and gaming project in California and a large technology building project also in California.

[Gary Smalley:]

Thank you, Ron. Good afternoon everyone. I will start by discussing our results for the year, after which I will review the fourth quarter. I'll then provide some comments on our cash flow and balance sheet as well as our 2021 guidance assumptions. As a reminder, we have provided in our earnings release and 10-K, a reconciliation of certain non-GAAP financial measures to most nearly comparable GAAP measures. These non-GAAP measures apply only to our results for 2019 and exclude the impact of the goodwill impairment charge that we took that year, as well as a tax benefit associated with that charge.

[Ronald Tutor:]

Gary, $1.80 to $2.20.

[Gary Smalley:]

Yes, Ron. That's right. $1.80 to $2.20. We believe this range appropriately considers the market conditions we are seeing at this time, including the remaining uncertainties presented by COVID-19 and the uncertain timing of anticipated federal supplemental funding for state and local customers. So in closing, let me provide you with the assumptions for 2021 guidance. G&A expense for 2021 is expected to be approximately $255 million to $265 million. Depreciation and amortization expense is anticipated to be approximately $110 million. Interest expense is expected to be about $67 million, of which $6 million will be non-cash. Our effective income tax rate for 2021 is anticipated to be approximately 24% to 26%. Non-controlling interest is expected to be approximately $35 million to $40 million. Weighted average diluted shares outstanding are anticipated to be approximately 52 million. And finally, capital expenditures for 2021 are expected to be approximately $20 million to $30 million. With that, Ron, I'll turn the call back over to you.

[Ronald Tutor:]

Thanks, Gary. To just recap at all, we had a very strong 2020 despite COVID-19 our results were underscored by strong double digit revenue growth across all segments; record operating income, with strong margins in the civil segment, and of course, the record operating cash flow. We remain optimistic that COVID-19 is beginning to abate, particularly now that widespread vaccination programs are underway and that pandemics future impacts on our company should begin to be reduced. In addition, as I've said, we find ourselves extremely well positioned to benefit from the strong customer demand, combined with the increased likelihood of substantial, federal funding targeted infrastructure that is long overdue. Our backlog together with a numerous large perspective projects that will be bidding provides us with confidence once again and our long term growth and success. Finally, I reiterate the obvious, very limited competition for most of our very large projects that we are pursuing, and the expectation that this will not change into the future. Our marketplace that we key to is the largest and most complex infrastructure projects in the country, where we believe we have the best opportunity to succeed. Thank you. And I will turn it over to the operators for questions.

[Operator:]

At this time, we will be conducting a question-and-answer session. Our first question comes from Brent Thielman with D.A. Davidson. Please proceed.

[Brent Thielman:]

Great. Thank you. Ron, in the past, you've talked about some jobs within civil that you've picked up that have margins above that kind of 10% to 12% target range. And I know you've got to get to that point in some of these projects. But I'm just wondering, how realistic it is that you might see some of that show up in 2021, versus what you got reflected in the guidance right now?

[Ronald Tutor:]

You're asking me to question our own guidance. The only thing, I can respond to is, I listed all of our very large projects. There's some five or six. New York Terminal 1 will conclude by the end of 2021 that it falls into that high margin category. And the balance of them will go on with the exception of CM 07, which finishes up in April or May. The rest of them have three and four years remaining. And I would categorize them as all high double-digit margins that we've talked about. And I'll remind you all that when we talk about these 11% and 12% margins in the civil sector, that's net of all of the civil G&A in the offices. So that'll give you a better indication of the level of margins at the job level we're dealing.

[Brent Thielman:]

Okay. And then, I guess how material, can some of this work in Guam need to – earnings in 2021? I know you're after a lot and you picked up a lot of work. Is that going to ramp up pretty quickly for you?

[Ronald Tutor:]

Ramping up dramatically, Guam has been has been just remarkable. I own Guam from the old Tutor- Saliba days since 1994. And this is now our 27th year and year in and year out, we were dominant on the island doing 100 million to 120 million, and probably making an average gross profit of 8 million to 10 million. I think it's a matter of public record that and this year end between the growth of work and Diego Garcia where we have a large operation with a government in the Indian Ocean, and the Black operation in Guam, I believe our revenue exceeded $300 million and our net profit before taxes exceeded $30 million. So Guam has virtually tripled in revenue and margin, and continues to go up with this incredible array of government spending. If you remember, I said that, the government has published a list of over a billion dollars to bid in 2021. In that area of the world, where we've had a very strong presence, so where I would have said four or five years ago, it's not big enough to impact our bottom line, it certainly has become such.

[Brent Thielman:]

Okay. Last question, just that the delays you've seen in some of this new work, you know, getting to the bid table, I guess, in any sense, whether some of this is also related just to clarity around an infrastructure bill. And it's wonderful to know way back it brings more clarity to these agencies in terms of moving things forward?

[Ronald Tutor:]

Well, I think it's a combination, since we're tracking anywhere from a dozen to 15 major civil projects, and I talked to most of those owners regularly. Some has to do with delays in the uncertainty around the pandemic. Some has delays in overall funding. I'm discovering now as we speak, a number of them are funded. And then a number of the following believe they will be within the next 120 days from the government. So what's happening, we're in undated with qualification documents. And I'm only talking to projects in excess of a billion dollars. We're not talking about the routine $100 million, $200 million, $300 million jobs. And I hate to demean those as if they're not big jobs they are. But these mega projects continue to line up. And we continue to put in our pre-qual. And to me, that means they're funded. So we remain very optimistic that there's going to be major infrastructure work in that billion plus category beginning to award by the third quarter of this year.

[Brent Thielman:]

Okay. Thank you, Ron.

[Ronald Tutor:]

You’re welcome.

[Operator:]

Our next question is from Steven Fisher with UBS. Please proceed.

[Steven Fisher:]

Thanks a lot, and nice job in a very difficult year. Just picking up on that last line of discussion, just really trying to understand how you guys think the revenue trend could go this year in terms of the first half versus the second half of the year? Are you thinking that in the first half of the year were up year-over-year, as you're still burning off some of this backlog, and the decline in backlog hasn't kind of hit yet? And then the second half of the year is down year-over-year. How do we think about that? And I guess, if you get these projects that are awarded in the third quarter is that, should we presume that that's going to be like 2020 work? Certainly just trying to see that kind of progression of the year and what it depends on?

[Gary Smalley:]

Ron, I’ll hit the revenue part if you won't mind and you do the last part. Yeah. So Steve, what we're looking at revenue for the first half of the year is essentially flat, mostly flat for the entire year, but trending right now a little less than flat for the latter part of the year. I think you can probably tell from our guidance and what we noted about the uncertainties, and with the uncertainties over new awards really, we're trying to be quite conservative in that projection. But that's where we are right now is overall relatively flat year and for most quarters flat, but trending a little bit south of flat in the latter part of the year right now.

[Ronald Tutor:]

Steven, I’ll speak to the impact. Gary did well, as we're looking at a flat year only, because I don't see any contracts proposing even turning in a price before the third quarter. However, I know of $10 billion in four projects that I’m personally talking to the owners and engage regularly where they're funded. They will bid in the third quarter, and they will be awarded by the fourth quarter. So I think we'll begin to see and when I say third and fourth quarter, you're absolutely right. We won't see significant costs and revenues till the latter part of the first quarter the following year. So, I think where we'll see a significant uptick in revenue and earnings accordingly will be in 2022, because although we have an excellent backlog of profitable work, it's hard to grow the bottom line if you don't continue to replace the work that you finish. So I look for this year to be just flat revenue -- flat. I think our earnings will again be solid, as we pointed out, but the next big upswing would be next year as a basis of awards this year.

[Steven Fisher:]

Okay. That is very clear. Appreciate that. And I guess in terms of just the cash flow, what's the calendar look like of adjudication that you have this year and how we should think about that might play out?

[Ronald Tutor:]

You will be aware of certain very significant settlements that are in the final stages, as we speak, that I've chosen not to speak to, for all the obvious reasons until they’re finally settled and executed by our owners. But we have had a significant number of settlements that will continue to contribute to this significant cash flow. And I see no reason that 2022 -- or excuse me 2021 will not exceed 2020. I look for this to be a very strong cash flow year with collections leading the way.

[Steven Fisher:]

Okay, great. And then lastly, you mentioned still having some work to do on the specialty side, to what extent do you think now that you've kind of turned the corner there, and what still has to be done to get those margins up at a couple 100 basis points?

[Ronald Tutor:]

We really believe the margin, the appropriate margin guide 6% to 7%. And of course, we haven't been making it. But what is happening is we continue to settle old claims that literally go back 10 and 12 years ago and an settling and cleaning those up, they have impacted the earnings. As we really review all of the existing contracts that have been acquired in the last four to five years, they haven't been the problems with the high margin. It's cleaning up the past, closing out old claims and old collections, and ending litigations that's caused the write-downs that has affected it. So is the muddy the victor, of what they're really making on the new work, which against what does this costs, is to clean up their old problem. This year should be very much nearing the end of that in the specialty group. So I think you'll get an uptick this year in the specialty group. And I'm in hope that a significant number of those old negative claims will be cleaned up this year, whatever it takes.

[Steven Fisher:]

Perfect. Thanks a lot.

[Operator:]

Our final question is from Alex Rygiel with B. Riley FBR. Please proceed.

[Alex Rygiel:]

Thank you. Ron, you mentioned competition. Can you dig a little bit deeper into that? Clearly, it appears to be more limited today than a few years back, especially last cycle. But in light of the potential for big federal stimulus dollars being available, how should we think about competition sort of in calendar 2021 and 2022? Do you think they all come rushing back in immediately? Or do you think they're sort of late to the party and don't really come back and compete with you until 2022 or 2023?

[Ronald Tutor:]

Well, let me speak to this, as I have a number of times. And then I think you'll have a better understanding. There's no one to come leaping back in, as you say. Skanska was a major player. Everybody's aware of the tremendous losses they took. I'm a firm believer, they will come back in again. Once they've digested those losses and seen the marketplace, they will come back in, they have the size and capacity and they will come back in that I believe those issues will impact their ability to drive low prices. And I think they will be a competitor. I think Kiewit is still the largest in our industry and they will be a player. After ourselves, Kiewit and Skanska, I can't think of anyone left in the US. Certainly, I don't expect to see Fluor back in my lifetime, given the losses they taken and the shakeup in their organization. And at the risk of others being angry. I don't see Becho playing a role. They haven't. And I don't care if there's one bid, I don't see them taking a significant role. The Europeans have all been here for 10 years. Their results are transparent and they're taking less and less of a role. Because you got to remember in this business, you still got to be low bidder, and then you got to take these billion dollar projects and produce them at the cost you estimate. This isn't a cost plus marketplace. It's hard money and you have to have the organization and the technical ability to deliver these projects. I don't care how much money you have, you don't have the talent and the people you cannot compete. And that's what makes it so difficult. I don't care if we're the only bidder there. In the world today, you can't count on one hand, the potential competitors for a major trillion dollar infrastructure program. And my peers not -- may not like to hear me say is that the facts are the fact.

[Alex Rygiel:]

And to expand upon that a little bit more. Do you feel as if over the next two years contract risk to you, and pricing can continue to improve?

[Ronald Tutor:]

Quite the contrary, we don't take the risks. We used to take, unless you're downright stupid. Why should I take an imposed owner risk? Two things take place in all our discussions with the owner. You either make the risk acceptable or we don't bid is option one. Or if the job is particularly desirable and they won't budge on shifting risks to us. We price the risk at such a level it's no longer a risk. The day of an intelligent contractor, assuming the risks of the owner are over. These contracts have to be fair and equitable to both parties, or we simply place it or we don't bid.

[Alex Rygiel:]

Very helpful. Thank you.

[Operator:]

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would like to turn the call back to management for closing comments.

[Ronald Tutor:]

Thank you all for indulging us. It was a great call and we enjoy being the bearer of good news. Until the next call, thank you.

[Operator:]

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.