Quanta Services, Inc. (PWR) Earnings Call Transcript & Summary

Good afternoon, everyone, and welcome to the KBCM Industrials & Basics Materials Conference fireside chat with Quanta Services. My name is Sean Eastman. I cover E&C for KeyBanc, and I'll be your host for the discussion. We're joined today by CEO, Duke Austin; CFO, Derrick Jensen; and IR, Kip Rupp. Gentlemen, thank you all very, very much for connecting with us today. I think it would be great to start out with a quick overview of the business. I've got some questions prepared, and investors are welcome to submit questions using the Q&A feature. We've got about 30 minutes. So with that, I'll pass the floor to you, Duke.

Yes. Thanks, Sean. Thanks for having us today. Quanta Services is really built around craft-skilled labor and our ability to perform work to enable infrastructure that basically provides for renewables, technology, those kind of things, backed up by the backdrop of utilities, about, call it, 70% of our business is utility business, and that's where you can see the CapEx, OpEx of the business going forward resiliently. We stay in that space. We use the craft-skilled labor to enable us with technology and other things that will provide certainty to the customer and work with the customer to collaborate on large-scale programmatic spends that you're seeing across the board to enable all the things that we've talked about in the investor sentiments. So I'm real proud of where we stand around $12 billion on an annual revenue plus, and we're really proud of where we sit today.

All right, Duke. That was perfect. So maybe starting high level, you said on the last earnings call, you think there's potential to continue to grow electric power at the double-digit rate. I think that in itself is noteworthy, but it's really that multiyear visibility that stands out to me in this space. So how would you characterize that visibility? How many years out can you see?

I think we've grown the business, the electric business for a long period of time in the double-digit type rates, especially on the base business. I mean, we see really good runways on that base due to the CapEx, the OpEx, you have some built-in inflationary measures within rates and wages, things like that. So you already have an artificial growth rate to that. And I do think the markets there are expanding. We're picking up more of the front-end spends from our telecom business which looks nice in the macro market, which is a part of that segment. So I like our macro market, I do think we have the ability to grow in the double digits on the electric segment. We're really comfortable on that base type work on a go-forward basis. And if you look at it from the EPS basis, I would say we're comfortable growing the whole business at an EPS basis double digits.

That's great. And you mentioned -- you alluded to picking up more of that front-end work. Could you give us a little more color just on how Electric Power's capabilities have expanded over the past couple of years, how that's been achieved. And perhaps how you'd characterize the runway there in terms of Quanta's ability to capture more share of wallet in this business?

I think when you go back in time, we are very transactional. The company was and the business itself was as utilities have evolved, and we've seen the CapEx become more complex. We continue to really work on how do we collaborate with them on the larger dynamic of capital as we saw it come out and the need for the workforce. The workforce, we also have attrition going on and still do through 20, 30-plus. Everyone, all of our utility customers have that going on, as well as CapEx going up, as well as interconnections of renewables, all those kind of things are going on at once. And so it became evident that if we could package that in the 1 program versus how in the past you would have, call it, back to a larger person that would be in that would say, hey, we can do it all, but they would come to us for, call it, 60%, 70% of the work, which is labor. And we got tired of being commoditized, and I think we moved up to the front of that and said, "Look, we can do the front of the business just as well." And so we've really worked hard on through acquisition. We have a nice engineered procure construct business around the electric segment. We've evolved there in the telecom even in the gas. So I still think that programmatic spend. If someone wants charging stations across the country, we have the ability to give them that today in a programmatic way. And I think when you look at the spend that our customers are talking about, we can deliver that in a program versus on a one-off basis. So that's what we're talking about when we say, front-end programmatic. So it includes engineering right away, logistics, lots of different things that allows us to get pulled through to the market.

Got it. And we've seen electric power put up book-to-bill above 1x, 4 quarters in a row now. I mean, really strong backlog trend there, Duke. Correct me if I'm wrong, but my sense is over the last 12 months, that's been primarily MSA wins. And is that strength in the backlog and those MSA wins, is it a function of renewals or expansions of existing MSAs? Are they takeaways from competitors? Or is it just sort of new work?

I mean, we're gaining market share, no question. We made some acquisitions that are in there. But we're gaining market share in the front-end side of the business. That methodology is certainly something that we're gaining ground there. But if you look at the customer theirselves, I mean, when you think about what everyone's trying to accomplish, they're giving multiyear guidance as well on capital. And everyone's trying to figure out, okay, well, how do we build the infrastructure we're talking about? And those -- the MSAs are also elongating where you used to have a 2-year MSA, and they got 3. So you're also seeing that dynamic as well. So the longer, more of them, and then each year gets bigger. And I think that's how we're really talking around backlog and what we see telecom as well. I would say the opportunity in Puerto Rico is not even in backlog. And so your earnings power of that is not even in backlog. And when you start equating that out 15 years and you were to justify that back to -- throw that back into what a revenue stream will look like on that, it's pretty incredible. And I don't think people are recognizing that yet either.

So I'd like to dive in on a couple of those components. But just before I get too far, I mean, everybody wants to talk about the labor situation this week. I mean, just to level set on it. Does the tightening labor capacity become a headwind for Quanta? Does it put Quanta in a more enviable position? What's the team's thought there?

I mean, if you ask me who we are, I would tell you, we're labor. That's the very core of who we are, is to get that right. To get that labor component right. We worked on it, we bought colleges. You can -- we have a really good path there and both with from a labor union standpoint, we're a union. If we're not union, still, we have the ability to recruit, maintain and really retain our employees for a long period of time. And I like tight labor markets. We do well in them. We do see some tightening, but we have not -- we still continue to move forward to grow the business. We made $100 million-plus investment in our ability to bring younger individuals or older individuals coming out of military, whatever it may be, through a process and craft-skilled labor that not only can they can get to market quick, but they can get to market productively. And I do think that you're seeing some margin expansion within our segments because we are growing our segments systematically. And while margin is not deteriorating, usually growth pressures margin more than it has so far. And so I'm always concerned when we talk about growing the business, getting operating leverage, all those things, a little pressure margins. We have not seen that. I do think some of that has to do with our investment that we made in craft-skilled labor in our colleges.

Yes. Okay. Really helpful. And big congratulations on the formal LUMA transition that hit this week. Nice job there, right on schedule. I think most of us understand kind of the financial significance. It's a very high-quality recurring earnings stream there. But is there a more broad sort of strategic significance here that's worth noting just around this win? And you mentioned it earlier, but tell us a bit more about this sort of follow-on capital project opportunity in Puerto Rico for kind of stand-alone Quanta down there?

I think for one thing, for us, it shows our ability to really look at an island, 3-plus million people and win on something that was very competitively bid that we can make a huge difference in the island and what they're doing in their lives. And so when we go back and we look at it, we always say we collaborate and we make a difference. Well, I mean, we know that the dynamics of the island and what's going on. And when we're able to look back 10 years, we'll say, well, look what Quanta can do. And I think ATCO, Quanta on the joint venture, but in general, we'll make a huge difference here. The fee base, if we do a good job, there's upside to that fee, there's escalations along the way, all result-based on the escalations, but on the fee up to upside to the fee. But that, in my mind, like it's part of it, but you're also training a workforce that you can move into North America, if you so choose. So people have ways to move up through the craft. Engineers here are really good, so our ability to train engineering and really be a part of the island, be a part of what we can do here from a labor force standpoint that has not been done in the past. And I think that will give us some pull-through into the Lower 48 and be able to move that in there. So that piece is great. And then there's also the $12 billion of FEMA funds that are coming on the island that we'll competitively bid like we do everything else. And I like our chances there on all that. We won't get it all, but we have a good track record when we're investing in something that we're able to do good things, and we'll do it here. And everyone wins if we do a good job. So we're really excited about it. It's a unique opportunity. It shows just the ability of the company, of what we can do.

Yes, absolutely. And of course, a lot of excitement around the Quanta story just in terms of how you guys enable the integration of renewables. So could you just sort of characterize for us that runway of renewable interconnection projects, sort of the velocity in the bid pipeline on those projects? Are you really seeing that opportunity come to the forefront here? Do you think it's reflected in backlog already or fully yet to come?

I mean, I think we've had interconnections of renewables ongoing for some time. The PTCs are obviously here to stay. It looks like solar is going down in pricing to where it makes lots of sense. So I think, in general, that's the sentiment. It's here to stay. And so that piece of the business, I think it continues to expand, carbon-free environment is going to expand. We're right in the middle of an enabling. And I just don't see that market going anywhere but up. Obviously, the administration's plans are accretive to anything kind of we talked about, like I think that just bolsters on to what we're saying. And so I do think that market, we like it, we see it, we work at it all the time about how do we participate in the growth of that market and enable it. It's something our customers want, so they're doing the same thing. I think one of the things people don't realize is there's also this dynamic around load growth that you can debate how much of growth, but there's no one that will say they're not seeing like 50% to almost double load growth in this environment where you got renewables going up. And that's out there. That data is out there. And I don't -- you start thinking about that where you have all of your plans going the other way and load growth, and you've been doing all this in negative load growth. So that's another dynamic that it's just not even on the radar.

And by that, Duke, do you mean sort of just the electrification of transportation, buildings, et cetera, and that's sort of what drives the load, yes.

Industrial is coming in, or your industrial base, I mean an agro farm going up, they're using 30 megs on a smaller agro farm that's vertical farm. It's 30 megawatts. So if you think about the data centers, 30 meg. So [indiscernible] on everything, how much is that. I just don't think people realize the amount of industrial load. And so well, how are you going to get that? How are you going to -- they have a robust enough system to do that? And it's modernization, hardening. The things that need to be done is right in our wheelhouse, and I still see just -- we're at the very early stages of that modernization to enable all those things.

And you guys noted in the first quarter, part of the booking strength was a big award, a big MSA award with a Western U.S. utility. Is that kind of a hint that this wildfire hardening work on the West Coast is really starting to ramp up? And do you think that award in the first quarter kind of captures that opportunity for you guys? Or is that not yet fully reflected in the backlog numbers we're seeing?

I don't think it's fully reflected at all. I think it's just the beginning there. Yes, the West needs to enhance the system for wildfires and also to enable renewables. So that's the beginnings thereof. Obviously, I commented before that the utilities, our larger customer out would become a utility again, and come out of bankruptcy and things like that. And when you start to see that, you start to get more programmatic in nature and run it properly and that's what's happening today, as they come out of bankruptcy, as capital gets more prevalent and they start to be able to look at it programmatically, we're able to say, okay, what does this look like and sign an SA and do some things like that, and that's what you're starting to see. It took a while, but we're getting there.

Got it. And a lot of people have been asking about this Texas power grid failure. I mean, it doesn't seem like the state really has a plan in place there at this point, but you're the expert. I mean, what are your thoughts on the situation there?

Look, there's not 1 solution. There's a bunch. And I would just say it's just redundancy. The grid needs redundancy, whether it's pipe, whether it's gridded from transmission. I just -- we need to get more redundant, especially our count is not really connected much. It's got some connection points but not much. And I'm just -- you're going to have to build transmission peakers, whatever you want to do, but you've got to get more redundant if you're going to look for that to happen. And that's a fix. It's not that complicated, and I believe it can be done relatively in short order, they just need to put some resources towards there, and we'll get it done.

Okay. Got you. And as we follow the utility capital programs, we went through so many really strong durable drivers of the spend here. Clearly, the willingness to spend is there, Duke, but do you see any risk to these customers' ability to actually fully deploy these budgets? I mean, specifically, I'm just thinking about permitting and siding, maybe stricter environmental regulations, things like that being an impediment.

I mean, most of the stuff that we're talking about are not mega projects. And so they're very -- and you have long lead times in your student materials. I mean, I think the COVID impact, there's some balance that needs to happen within commodities and within materials, within fleets, those kind of things. That will balance out over the next 12 months. I mean, we did a good job with our fleet. We did a good job with the things that we can control. I'm not to say you won't have a one-off job that may have a fiber shortage or [indiscernible] I do not see widespread shortage in anything at this point. And can it happen? Sure, But I'm not seeing that. And I'm not seeing the capital markets slow down at all. So the capital market seems robust. So we're down to whether the commodities -- COVID's kind of past us and we move through that. I do think there'll be some little bit of noise in that, but not something that we're seeing that seem common about. If you asked me if I see anything? That would be the only thing.

Got it. And obviously, the business is just super well positioned under the new administration's priorities. But are there any policy proposals out there that worry you guys?

I mean, our markets are in good shape. And I would say our Canadian market is weaker. And so when you think about it, we talked a lot about the Lower 48, that's seen good growth there, but the Canadian market does have impacts, they're still ongoing. And COVID is not near where we're at and [indiscernible]. It's coming, getting better, but still impacts to that market, and that market would be the one that we need good regulation there and some things to make it more robust. And I do think that it can, and we do see lots of bigger projects out there in Canada that are certainly on the board, and I do think they need to spur the economy. So some of that will get pushed along and they have their same renewable sentiment. The same sentiment that's going on in Lower 48. So we feel good about it. It's just a little bit different than common.

Okay. That's interesting. And maybe moving over to telecom. You guys continue to target like kind of a $1 billion-plus revenue run rate there. You're running at around $700 million this year. Can you just talk about Quanta's competitive positioning in telecom and maybe tie in the significance of the strategic move in fixed wireless that you guys announced this past quarter?

Yes. I mean, when you look at the company, we're doing well, really good macro market. We took our time on the growth. We have a couple of markets we talked about on the call. We got ahead of ourselves. We pulled them down. And when I look at it, when I look at it holistically, we still see an abundance of opportunities. We're not in any city to just give us a big issue. we do it the right way. We had some impact, but it was really manageable. We worked right through them. And I feel good about where we're going, and we have a great customer base. And the technology that we're working through is really 5G, how it interfaces with the utilities that allows us the technology, in a programmatic way, to work through, and with 5G, to add backlog as well for us, and it's really a collaborative effort to provide product and service. So we really like that long term.