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

Everyone, good afternoon. I'm Noelle Dilts, and I cover specialty engineering, construction and services here at Stifel. We're joined next, fortunate to be joined by Quanta Services. Quanta is now a $12.8 billion market cap company. Many of you are familiar with the name. So we have here today, Duke Austin, President, CEO and COO; Derrick Jensen, Chief Financial Officer; and Kip Rupp, IR. So the format is a fireside chat, if you have any questions, please submit them through the dashboard. Those will go to me, I'll then ask the company those questions, so please feel free to submit those as we go through the presentation.

So Duke, I thought we would start off with just kind of discussion of the LUMA Energy joint venture, news came out that on June 1, you kind of moved to the full transition, really with the timeline very consistent with what you've talked about before. So could you kind of talk about how the transition went? Any kind of lessons learned along the way? And how you're feeling right now in terms of that transition?

I think we're probably 7 days into actually being on running the system. And when you're this early, look, we can learn things all the time, but it went as planned, in my mind, or better. So I think while there is noise around different things as you transition, the overall result, I think, is beneficial to the people of the island, beneficial to us, our investors. And then we've done a nice job of overcoming some of the noise that would happen in any kind of transition like this. It was an 80-year old union down and just different things that we were trying to accomplish to make sure the transition went smooth. We did a nice job. And overall, it's a long-term 15-plus years that we're not even in yet of us operating a system, giving what I think is world-class service to the people of the island and as well as enrichment of the workers. So that being said, we've got a long ways to go to make all of those happening, one of the worst-performing utilities in the world. And as we go into it, we need this. So we'll be upgrading through the FEMA dollars and working through those things. But -- and what we're trying to accomplish now, we're right on schedule.

Okay. Great. And outside of the LUMA JV, you've talked about some opportunities to bid on other projects, I think $10 billion. Any kind of thoughts on where those stand? And how we should think about the timing of when these could start to come through in terms of bidding an award? Could this be a 2021 event? Are we looking out to kind of 2022, 2023?

I think as we look at it, when we think about it, as fast as we can implement in FEMA dollars into the system, we would want to do that. I mean we need to be able to actually bid and win, just like we wold on any other project, but we are on the island. We do have knowledge of the island. And I think we have just as good of opportunity, somewhat better than most. But it's separate. It's a firewall, and we'll be prudent about it, obviously. So I think when we look at it, though, the opportunity will come later half of this year, we'll start some of it, but the majority goes '21 and beyond. And it's like an incremental $1 billion a year to the budget, something like that, to already a nice budget plan. So those things are really to implement generation, to implement renewables, to make sure that the modern -- the island has a modern, robust system. And yes, right now, I would say like we're turning breakers on and off in your house, and we want to figure out what's going on with the breaker and fix it. And so that's what's going to happen over the time frame.

Okay. And just with the hurricane season coming up, any kind of comments on how that -- it's complicated, you've got this grid that's challenged, then you're coming up on a storm season. Just any kind of quick thoughts on how to approach that side of things.

I think the reason we're in Puerto Rico is originally we were perplexed on how they picked up the island the first time. And so we did not participate in that for various reasons. And as this came about, we felt likely to do a better job. And I think we're ready, to a certain extent, if something was to come in the Gulf, we'll pre-deploy with equipment. We're going to find resources. We can do a lot of things that weren't done in the past and have the means to do so to help the island and help the people. So I feel comfortable. Look, it's a fragile system. If something was to hit, we'll be remarkably better than they were before. Would it be good enough? Probably not, not the first day. We want to be world class, and we tend to pick things up around 130 days at the longest. So it's more like 10. And we have to be able to get there down the year. And we'll do our very best to make sure that happens. We're certainly more prepared than it has been in years past.

Okay. Great. So just shifting over to electric T&D. We are very big believers in this idea that we're moving more toward an electrified society, more electricity coming from renewable energy and then using that for things like EV, industrial usage. So just in general, when you look at the system as it stands today, we've been seeing good upgrade for, by our estimate, 11 years. But where do you think the biggest efficiencies stand today? Is it larger lines to kind of unlock the wind resources? Is it more distribution to support EV? Just kind of curious how you're thinking about the relative size of some of these opportunities moving forward.

All of the above and they're all big. And so I said I'll go through them. But in my mind, you're going from a carbon footprint to a carbon-free footprint. That's a big test of what you can do in a transmission system. And I think if you go and you say, well, I'm going carbon-free to the point where what we're hearing, you need -- you got to double, really, the transmission system. That being said, that's a long process when you work through that. So that's a big, big task. And I just -- it will be years of rebuilding as well as upgrade. So I just think it's going to be a while there. When we think through -- and all that would be incremental to kind of what we see underlying as well. I mean we're already seeing some generation switching and things like that. There were interconnections. We've seen that for a long period of time. But when you get down to where you're saying, like your 10% renewables or so and you're going to 60%, whatever, carbon-free, however you want to call it, I think that's when you start to see incremental transmission East to West, some interconnections in between, RTOs, things like that. State rights getting involved and all that. So it's just it becomes complicated. I do think they'll get through some of those. And definitely the sentiment around renewables and what we're seeing from the client as well as the public, I mean that's there, it's staying, and we're continuing to move and see generation switch to carbon-free. That being said, and also then you have the EV. So you have your electric vehicles, it's taxing the distribution system, which almost every vehicle, every carmaker is going towards EV. So you have all the battery charging as well as stations as well as all that. Then you have data centers. The data centers are driving a significant amount of load, 30 megs at a time. And so that's driving load. I was just recently on looking at an agro farm that was a vertical farm that was going to pull another 30 megs on a farm because they want perfect growing conditions. Well, so you start to add all that up and you start to say, "Okay, well, my industrial load is going." And now you're starting to see where industrial, they're talking about industrial load, your load growth growing about 50% or more, even heard as much as doubling where we're at today, where we've had a negative load growth.

Right.

So if you start to say, well, electric is going to double the load or even, let's just call it, 50% while you're replacing carbon, it becomes another issue. It's like, okay, well, how do you reach that demand while you have attrition going on in the workforce? So I believe we're enabling all these things. We've prepared the company from a cross-skill labor standpoint because we believe that, that was going to be constrained. So we spent the last 6 or 7 years building the company around this draft, and then building the front-end service side of it to make sure that we can handle this. And I think that's what the company has been built for is this.

Very in line with everything we're thinking. I mean it's crazy because it's been so long since we've talked about load growth, and it does feel like now there are all these dynamics together that it becomes part of the equation again. We felt like there was a pretty -- very strong outlook even without that -- even without load growth. So one of the things you mentioned was around some of the challenges of getting larger lines off of the ground, states rights, some of those issues. I thought it was interesting that the Biden infrastructure proposal, kind of there were some elements that tried to address that. You saw federal infrastructure -- or federal transmission corridors coming back into play. I mean do you think this is something that can -- these issues are something that can get resolved in the next couple of years? Or do you think that that's like a 5-year sort of transition, trying to address some of the siting cost allocations, states versus federal rights that have really hindered a lot of these larger projects?

I think if I go back to like highways and think about it like that. And as a kid, I used to go to Louisiana, and Louisiana had bad highways because they didn't get federal dollars, and they would have changed the age of drinking. And so when they changed the age of drinking, they got federal dollars and the highways are great. So if there's going to have to be some disincentive or incentive at a federal level for the states to -- in my mind, I don't know any other way around it, and when you start moving federal dollars in the states to enable some of these things that happen, and I think you'll start to see it move faster. Albeit most states are of the mindset that we're moving to a renewable portfolio, the problem is most don't understand how difficult it is without transmission. And so I mean we saw it in Texas. But if you don't have enough redundancy in systems and you get some events, what can happen, whether it be gas, electric, wind, don't matter. You need redundancy. And I think those are the things that will enable that will be transmission infrastructure.

Okay. And I guess the last point I wanted to stand upon that you mentioned was just this outsourcing trend. Obviously, it's been a huge growth over the past several years or decade. But can you talk about how much of your work at this point is full EPC contracts? Is there still opportunity to expand with -- into new utilities that maybe haven't fully embraced that model? Just how are you still thinking about the opportunity to kind of further that model across the utility space?

I still think it remains probably less than, I'd say, roughly 10%, 15% of the business or less, less than 15%, more than likely, on EPC basis. But the pieces thereof, can we do the front-end engineering, can we do right of way or can we do different things that we don't do to get the pull-through like what we're calling front-end services to enable really our [ crowd ] scale, our construction to move forward and collaborate with the customer? Yes. And we want to do those things. The material risk, things like that, not many customers will want to buy in bulk, and they can do a pretty good job at that. No one will take that on. But the e and the c and some of the project management in there, I think, yes, and we will do that and are doing that now. I don't like the commodity risk, things like right-of-way risk, those risks, but we just output risk. We have hard time in our hands around and willing to get in front of that. But helping them around the front side and environmental permits or whatever, helping that, facilitating that, absolutely.

Okay. Great. So obviously, labor availability and labor costs have been a hot topic across the conference today. [ I know ] that you've really invested a lot in the colleges and training resources and that also that your union labor gives you some visibility into wage increases. But just generally, how are you thinking about the availability of labor? Are you seeing any sort of isolated or regional areas where it's hard to find the folks that you're looking for, whether that's kind of the unskilled portion of the market or maybe some more trained electricians? But how are you looking at the market today from a labor perspective?

I think it benefits us in every market. It is tight. We're able to -- we haven't stopped bidding work. We haven't stopped executing work. And we continue to take on more and grow the company. So we're not hindered by labor at this point, and we have escalations within our contracts and things of that nature. So the company itself are getting people to the field quicker. We're training better because of all the colleges and things that we've done. So it's the growth aspect. We're getting leverage at the operating level from our training because they're more productive, quicker when they get to the field and then our margins are holding. So that shows you kind of where we're at, even with the growth underneath. And I think we're set up for this. We've prepared for it, and I believe that we'll be in really good shape as the market tightens.

Okay. So taking telecom out of the equation, talk about that next. But could you just kind of -- how are you thinking about your margin targets in the electric [indiscernible] U.S. has been running at north of 10%. Canada has been somewhat of a drag. Can you really drive margins higher just more on the electrical side of the business? And what does it really take to get there?

With Puerto Rico, you're going to drive lower. I mean we've said that. But if you take out Puerto Rico out of the aspect and just think about the traditional margins, we are driving them higher today. We're getting operating leverage. What I think is happening and I -- as the company moves forward is we're combining facilities where we're running more gas, electric, telecom out of larger facilities and creating some operating leverage, which is falling on the bottom line. And while you're seeing it on the electric side because we report segment, it's also helping all the margins of the company. And rather than segment it, I would just say the overall margin profile of the company is still not a double-digit -- adjusted double-digit EBITDA. And until we get there, we're not going to be satisfied. And then when we get there, we're not going to be satisfied. But we should get there. And that's what the goal is. And whether it be because we're making more out of the electric as we get more leverage, or telecom because we're getting more leverage, fine. But we need to get there. And I think that's the goal of the company is to make sure that as a holistic company, as a company and we look at, those all 3 segments that we can get there, 2 segments.

Okay. So shifting over to telecom. You've targeted this longer-term level of at least $1 billion in revenue. You're kind of coming off of the first quarter where you had some challenges on the margin front. I guess, first, are you kind of through that? And second, could you just kind of talk about we're seeing a lot of opportunity out there in the markets? How are you ensuring that you're kind of taking on the right level of work that you're able to meet those commitments, such that you're able to kind of get to those high single-digit margin targets that you're looking for this year?

When we go back and we look at what we did, we grew it organically for the most part, some of those small acquisitions regionally to kick start some of the things that we're doing. But I think when we look back and we say, "Well, what are the things that we got wrong," I mean our engineering up front wasn't good enough, and so that cost us on the back side of the business. And that's why you've seen us bolster up the engineering side of our business, so when we go forward, our product's better at the front and you end up with a better result in the back, which we had a few issues. And we owned them with [indiscernible], moved past it. We're in good shape going forward. The opportunities are certainly there for us to deliver double-digit margins in line with our electric segment. And especially as we look at the operating leverage we can get out of these units in the field on a go-forward basis. And the markets on all aspects of it are good, whether it be 5G deployment from antennas to backhaul fiber, to fiber to the home, it doesn't matter, the markets are robust. And then you have your [indiscernible] when you come in as well from our cooperative customers and others. And so I think, in general, all those things added up with the markets out there, it's a good market.

So I know you've really targeted growing this business organically. I guess there could be some interesting midsized targets within the space. Is it just that they're too expensive or you just feel you can do it on your own? What's the preference? What really drives that preference for organic versus inorganic?

I don't think we've really -- if we saw the right company, we would lean into it. We just -- we've been through this before when we bought 130 telecom companies and rolled them up. I was here, and I remember it vividly. I'm not doing it again. So we're going to be very prudent about how we go forward. And we're going to be smart. We know what -- how to grow. And so I think, in my mind, we're doing a good job organically. If we see the market move in a certain way that we can't, then yes, we would look regionally. When we see the right company, we would lean into it. So far, we've done a nice job just pacing.

Okay. So I want to shift over to underground utility and infrastructure services. The LDC business is an interesting business that you've built there over the years, fully impacted by the pandemic. Could you kind of speak to how the recovery is looking in that business? And are we back to pre-pandemic levels? And how are you thinking about the margins as we move through the year?

I mean the LDC business is good. We continue to see the necessity of natural gas, especially at the customer level, with the backbone basically the void of electric or whatever it may be. I mean people want a choice. And so almost all of our new construction has a gas component to it. And the ones that don't, you still have cast iron replacement, replacement projects go on up 30 years, and so you're continuing then to see that. I know a few places in California you're hearing on oil and gas, but it's very, very small. I think most of our gas business is back to normal. We're doing well. We like the business a lot. It's a long-term business. And I think that the assets, if you look at what someone paid, I can't remember who it was, for CenterPoint's gas assets in a few states, it was pretty significant. And so when you think about that, what's it worth for us to go back and replace the old system, I think it's certainly there, and you'll continue to see that replacement as you go forward.

Okay. And then just on the Integrity side of the business pipeline, Integrity work, right now, environment where it seems like it's getting more and more challenging to build large pipelines. Just last week, there was news about giving the states more power as it comes like for water permits and just these state challenges to pipelines seem like they're getting more intense, right? So as it becomes more difficult to build new pipelines, does the value that you provide with maintenance and Integrity work, does that kind of increase the demand for those types of services as you have to maintain the older network?

I mean I think when you look at the systems in your infrastructure, if you're going to elongate the system, what you're going to have to, you're not going to build renewables as fast as necessary but to back it up with something. I know buyers are coming in, and I think that will help, but you're still going to need these natural gas platforms. You're exporting LNG as well. So in my mind, those things become something that we'll have to maintain longer lives, more Integrity work over time, and we'll continue to see that. And we've invested in it, and I like the business long term.

Okay. And we actually heard from a couple of companies today that the overall midstream market is looking a little bit better and that there's some larger things coming back into the market. Any change in how you're thinking about the business and what you're seeing in terms of opportunities?

Renewable's up. So any time oil prices move up, the business gets better. It fluctuates. It's something that we see. We're opportunistic when it happens. We have the assets and the people to do it. But it's not -- if you ask me where the company is going long term, it's not going in something that, that fluctuates so much. We don't necessarily want to be big for these, for example, where you just move up and down. I mean I just don't think that is who we are. We have more stable, consistent earnings streams. And yes, we'll be opportunistic on -- if the midstream business goes well, nothing for us to move in assets and build out pipe. Nothing. It's easy. So we can do it and we'll do it. And we do, do it. It's just not something we'll invest in.

Okay. And then shifting over to Stronghold industrial services type of work. We've seen refinery utilizations and crack spreads improve. We've talked to, again, a couple of companies today that are echoing sort of part of what you said on calls, the spring turnaround is better, obviously, than last year. The fall is looking better, but it may be 2022 until you see a full recovery. But I would say, overall, it feels like the feedback or what folks are seeing in the market is a little bit better than maybe what we talked about at the time of the first quarter call. How are you thinking about that?

I think that's right. I think it's getting better. And as airline traffic picks up, as the economy [indiscernible] as people move around, vaccines get prevalent, the business is going to continue to get better. And the delay and maintenance will come in '22, '23 and beyond. Those will be robust years. And we see them, they're there. How quickly will it be in '21? It's going to get better. How quick is the question. I think in the call, probably we'll have a better idea of what the second half is.

Okay. So we've been calling for margins that we expect the underground utility and infrastructure margins bottomed in the first quarter, could get better through the year. So is that still kind of a fair assessment? And then I guess, just in terms of you're trying to get up to that high single-digit margin target, what's really the key elements that you think of as you look at getting to that level?

Well, 2 things. I think if you segment, we need to get, obviously, our strong oil business back to normal and upper single digits, which we -- going our way. The LDC business recovers, which it has. And then I -- in my mind, it's really getting the operating leverage out of running the operations in the field holistically, and I think you'll start to see in the fall is such that we'll increase the margins on the whole thing. So that's the second piece of it. And look, if you were to get big pipe kicking in, in Canada, obviously, that's an uptick. And any of that stuff that what was to kick in is uptick. It has the potential. We said there's jobs out there. There's projects out there in Canada that have depressed, that are there. That economy needs to move forward. And I think you're going to see some energy. You have plants and you have half-built pipe and 1/4 built pipe over there, and it needs to be built, and they're right there. So I think any of that's opportunity that could come in and certainly help the company from a margin standpoint, but we'll get there either way.

Okay. And then, Derrick, just on cash flow, it's been really strong recently. You've talked for a long time about this countercyclical nature of cash flow. I guess, first, when you look at 2022, what do you think that kind of -- or I'm sorry, when you look back at 2020, how do you think about what that said about that countercyclical kind of dynamic? And then how should we think about things as cash flow usage, as activity starts to pick up in 2021 and into 2022?

Yes. I think '20 maybe validated the countercyclicality we've been talking about. Over the last few years, we've seen some up and downs of the revenue cycle, and we've talked about how, for us, a big component of the whole equation was how far and how accelerated our revenue was growing. We were seeing revenue growth rates at times in excess of double digits, and it was pressing our free cash flow down a little bit because, obviously, the first thing we lean into is the working capital of the business to support that growth. And so higher levels growth reduces free cash flow. Lower levels of growth, like you saw somewhere in 2020 with the COVID impact, brought back around that countercyclical. So I think it was a nice bookend over the last 6 or 7 years to show how that has slowed. As we sit here, what I'd say is those mid-single-digit to slightly above growth rates lead to about a 40% to 50% free cash flow conversion. You start trending up to that double digit, you start pressing that number, free cash flow conversion down a little bit to the extent that you have a lower level of growth, and that's what brings it up to more than that 70% and 80%. Modeling out for several years, I think that most people would be looking at those mid-single to double-digit opportunities, should give us at kind of that 40% to 50% type of dynamic, 40% to 50% conversion dynamic. Strong free cash flow then, and that's where we come back in looking at the way that we've deployed capital. Really, we guide people towards looking at the past. Over the last 6 or 7 years, I think we've done a pretty robust M&A program and a pretty robust buyback programs as we look to the future. I have no reason to think that we'd be looking at capital allocation anything different. We're not a company that likes to sit here and try to hold a lot of cash on our balance sheet. We don't think that's the best value creation. So whether it be leaning into growth, leaning into M&A, leaning into buybacks, whatever we'll be doing, we'll be looking to deploy that capital to create value.

Okay. And I mean how -- the stock has obviously performed really well. I mean how are you thinking about the relative attractiveness of share buybacks versus M&A at this point?

We look at them against each other. I've always looked at it and say you don't know anybody more than you know yourself. And so the first thing you should be is looking at taking value against myself. And then and only then, if I'd be like M&A creates more value, then I'd pursue it. We do believe that inherently, M&A has the ability to create more value priced right because it's a multiyear value creation and generating incremental future cash flows. But we'll be looking on back and forth as we always do. We think there are good opportunities that are out there. We're not going to target anything in particular years to how much we deploy, but we'll be looking at an M&A environment but, again, measuring against what we can do for ourselves.

Okay. In the past, just from an M&A perspective, we've talked about maybe kind of looking at adjacent markets, water. Anything -- any kind of interesting avenues that you're exploring today as it relates to M&A?

I think when you look at the company, we pride ourselves on long-term family businesses in craft skill and around the craft skill labor, and we want to be consistent. We want to consistently earn and I have -- around craft skill labor. So anything around that, we're comfortable with. And that's what we understand, and that's what we would lean into. Whether -- it doesn't really matter what median you're in if it involves the craft. And so I think we continue to look at all those things as we look forward. If we see the right business and the right profile or the right platform, we would look at it.

Okay. Great. Any -- I guess, any concluding thoughts on how things are shaping up? I hope you're still feeling pretty comfortable with the expectations or any other key takeaways you'd like to leave with investors?

No. I think that Quanta sits in a really unique position, whether it be from deploying battery chargers to batteries to whatever, data center, however you want to think about it, however you want to play with technology, however you want to look at the sentiment around renewables and carbon-free infrastructure or just traditional infrastructure. We sit in a really nice position. We continue to see the underlying business grow. We're working and collaborating with our customers, growing our backlog, working with them on their different models. And so I think we're in a unique position. And I really like where we sit and I think the future is bright. We're certainly not sitting here just thinking about what we're doing today. We're also thinking about what the next 5 years looks like and what we can do going forward to grow the company. And I don't want the investor base to think, "Well, we'll just buy your stock back." It's not about that. It's also we're going to organically grow, how much can this programmatic spend in battery charging, how much can we deploy across North America. How much 5G can we deploy? So it's -- we really thought through the programmatic spend aspect of this and got out of the [indiscernible] business. And so that's what we see us doing as a company, and that's why you'll see the growth and also from a return on invested capital to all the things that we said we would do, you'll see. We're optimistic about what we think this year is going to bring on a go-forward basis.

Okay. Great. Well, thanks so much for joining us. If anyone has questions for Quanta, feel free to email them to me at [email protected], and we will get those answered. Thanks again.

Thank, Noelle. Appreciate it.

Thanks.