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

Great. Thanks. So excited for our next panel today with Quanta Services. Have the CEO of Quanta, Duke Austin here. Duke, thanks for joining us today. I think with the continued -- probably heard the words transmission, undergrounding, things like that, more than ever in the sector over the last 6 to 12 months. So I thought it would be really helpful to have Duke come to talk about the Quanta story. And just by coincidence, in the last few weeks, Quanta just made an acquisition in the renewables business, so even more connection. So before we get to the Quanta story, let's have our poll question.

Does the Biden administration succeed in accelerating transmission growth? Yes or no? So that's not proposed, that's do they succeed with it. Maybe a little bit of a softball, but we'll see. Okay. Great. Thanks. So Duke, just to get us started, we'd love to really get a snapshot of Quanta's company and your different business lines for some of the investors who don't know you as well.

Yes. Thanks, Steve. Thanks for having us. So when you look at Quanta, holistically, I think really at the very core, it's cross-skilled labor and our ability to provide about labor and certainty to the client. And I go back to, really, if you've built a home, it's a frustrating experience many times because the labor is unavailable or timing or things of that nature. So that's become a real issue. And I think the company we built has really tried to work really hard on the craft piece of it. So when you look at T&D spend, which -- if you look at Quanta holistically or without Blattner or around 12 3, 12 4 run rate with Blattner, it will be over $15 billion run rate in annual revenue, it will end in next year. So that being said, it will be somewhere in the neighborhood of, call it, 60% to 70% utility back. And when you think about that, it's around the T&D spend that's really driving that, and also gas, LDC, basically replacement -- pipe replacement or new build there on gas. So that's really the backdrop of Quanta. And then we're talking on engineering, front-end services and things of that nature to make sure we facilitate, provide certainty, cost certainty to the client. And when I look at utilities when we're collaborating, when we think about it and we kind of coin us in. We got it from Blattner really, and I thought about it a lot. I mean, we're really building people here, and I think that's really important. It's not things is people. And I'm concerned around making sure that, that crafts there, we bought colleges. We really worked on honing that craft over the last, call it, 6, 7 years to make sure that we've invested. We've invested well over $150 million in making sure that our colleges are curriculum that collaboration, and the programmatic spend that you see at the utilities that we're able to execute. And I think that's really important. They depend on us on being consistent on our EPS. They are doing 2 things. They're spending on T&D for new renewable interconnections, prior hardening storm, modernization of the grid for, on the other side, on your part of footprint going from coal to gas, even to more of a renewable footprint. With the Blattner acquisition, we should be on both sides on the tip of the spear, and able to very, very much collaborate with the client.

Okay. So just maybe for the uninformed, just a little more flavor on what do utilities hire you for? Like what do they do in-house with their employees versus what is Quanta get hired for? Is it the day-to-day core business part of T&D? Or is it mainly new growth projects, upgrade programs, things like that? Yes, that would be helpful.

Yes. So when you look at a utility, I think we really supplement their strategies and collaborate with them on the strategy. So no matter what they're doing. Whether it be from planning to asset allocation. What -- however, wherever they're trying to spend their capital on, we're trying to help them think about long term, short term even, around how to do that. So it's from planning all the way down to executing in the field. But I mean, on the face of it, it's craft-skilled labor lining in the field, for example, would be great. And then what we've done is when I think about it, engineering needs to lead a lot of these programs, where now it's -- we believe that the constructability, the construction leads and then we have engineers, we have about, call it, 3,000 engineers that are engineering support that tack on to that construction. So it's more construction-led, which in my mind, gives certainty, price certainty to the client, and then we engineer on the backside of that to the -- with the client. So I think that's where we come into play. So if you hear, for instance, I'm going to spend x amount of dollars on fire hardening or undergrounding, we would be in the front side of that with the client saying, okay, how do we execute this what's the most efficient prudent way that we can basically supplement or help, typically not so much on permitting and we stay out of a regulatory framework.

Great. And so maybe just on transmission, maybe transmission and distribution. Just when you look at the trends that you're seeing from your business standpoint, for that. Are you seeing this business kind of take-off right now? Is it more utilities kind of waiting to see how things play out with some of the new Biden plan and the like or just be interested to get your perspective on the trends in the business that you see?

Yes. So on the transmission business, if you just -- our core business, just on the electric side, call it, it's around 9 -- call it $9.5 billion of just electric business, about 85% of that is under $100 million in size. So they're not large projects. They are more programmatic spends, both distribution T&D. On the transmission side of the business, what we've seen and what we are seeing is the larger project dynamic is certainly coming back to the business. When crises going on, call it 7 or 8 years ago, there was a large project dynamic. We have some large projects going on in Canada, really interconnections between the renewables and the RTOs, things of that nature pushing west as well as just along the Eastern Seaboard. Many of those larger projects are certainly on the board, and we're looking at them. I think that activity is certainly prevalent. Administration is obviously pushing some of those with tax incentives and things of that nature. As everyone knows, it's difficult to -- states have a lot of rights in these things. And certainly, there're some impediments to get these big projects built and we're all optimistic.

Yes. And -- but it sounds like more of your business is more just the upgrading the existing transmission that it is the big new projects.

Yes. I mean I would say, if you think about it, if a large project comes out, we'll be there, and we probably do, I would say, 75% of upwards larger projects, 500 KV and above in North America. So it's -- we're certainly around the edges on it, but it's not something that there's -- for us, we're really just trying to solve for what the client is trying to solve for. If it's shorter interconnects, connected renewables, we're happy to do them. And what's happening is the upgrade of the grid and get the redundancy that's necessary with the amount of renewables coming on to the intermittency that it causes without batteries, certainly transmission solves for a lot of those issues, short -- even short transmission.

Yes. And then how about in terms of like things like grid modernization and work like that, are you involved in that type of work as well?

Yes. Very much. So I think when we look at the programmatic spend, if you hear a capital budget, a 5-year programmatic spend, which we hear pretty much daily for someone spending $10 billion, $20 billion, $30 billion over the next 5 years, 10 years on capital, that's us. We're right in the middle of it. Will it either be on a programmatic way, will be construction or it will be all of it, where we're engineering though typically utility would procure the equipment. We're on the backside of it. Sometimes will EPC engineered procure construct and substations, things of that nature. But on a normal basis, typically, we're either program managing and building, construction. But whatever the clients asking us to do the -- on the ongoing build. And I think you have attrition going on in the utility space. It's pretty prevalent. And I think no one is replacing for this kind of build over the next 10 years. So we're supplementing that as well as the growth. And also, I think you're getting load growth, so you're getting some new build as well. And I think one of the things I see is the amount of load that's coming on to the system as well over the next 10 to 15 years that some have not seen that yet, and it's coming.

Yes. That's, I guess, EVs, electrification, data centers. Yes.

EVs is something that I think -- when we think about it, we have a technology group in Raleigh that does a lot of planning for utilities and we see the EV impact on the distribution level to be substantial.

Let's talk some about I guess, hardening, transmission and climate change. And I'd be really curious of your perspective on -- with more, let's call it, climate change type events, does something big, different need to be done to many utilities, grids. And just your folks are seeing it real time all over the country. So I'd be curious, any perspective you have there.

Yes. Steve, I mean, I'll start to the West and just say, I mean, 10 years ago, I got the question, do you think we should underground. I don't know it's like no way. It's too expensive. Today, I would say in the West, I don't see how you cannot underground. But it's too expensive. And when I say that, I'm saying it because I don't -- the underground in certain areas to the west and the fire-prone areas, the insurance and what happens with the way the law is in the west, it just doesn't make sense not to. And so I do think what you're hearing is it's going to happen and it makes sense for it to happen. It's the right thing to do if that's the standard. But the standard of care is that the tree builds in the line and that causes a spark and that spark causes the fire, the utilities are ultimately liable for it, and we need to do underground, no question. And I -- it's something that we all have to get our heads around and you will start to see that. But I also think in these wind-proven areas, that makes sense, whether you go with storm hardening with concrete still on the Gulf Coast over in the Eastern Seaboard. I continue to believe that we'll see upgrading of both the transmission and the distribution circuits along the coastlines. It's just -- it's necessary that the storms are getting -- you can't deny the fact the storms are getting more impactful to the systems.

Yes. On undergrounding -- in California, undergrounding in California, there's been -- PG&E used to say it was $4 million a mile, then more recently, they've been saying $2 million to $2.4 million a mile, but hoping that will end up if you did it in scale, it would be lower than that. Any sense you have on the cost of undergrounding in, I guess, in California?

Yes. I mean like so I hate to get in front of that. I would just say, in general, from my standpoint, it just depends on the regulation involved in like all that's possible, but it depends on permitting those kind of things that tend to impede progress. And that will be the issue. Yes, if we can get clean, clear permits, right away, everybody is on-board of what we're trying to accomplish, and there's not a lot of impediment to progress, sure. But typically, at times, things don't want to get -- in certain areas, you can't move and if you can't move you can't build anything to [indiscernible].

Yes. The -- is it fair to say that if you're doing a project in scale would lead to lower cost than doing it kind of piecemeal?

I think if we do it right, if you can scale it, you can look at it properly and do it upfront and scale, yes, I think you can get cost down for sure.

Okay. How about more than just California, though, for example, I don't know if you do business with Alliant in Iowa, but they've been undergrounding for a few years now, distribution, and plan to keep doing that. And we actually had them on a couple of days ago. And they said, yes, no one really was that interested in it, but suddenly, a lot of other utilities are talking to us about it. So I'd be curious of just what you're seeing on undergrounding outside of just California? And could that make sense?

I mean, we see undergrounding quite a bit now. I think what California is saying is we're undergrounding transmission even 69 KV, underground significant amount of old infrastructure, which is a little different. I mean if you go to San Diego and you think about San Diego, I would say, above 60% of San Diego is underground. I -- that's quite a bit. We've been underground in most of the modern cities for long. It's just the older cities that are not underground, it's going back in and trying to underground the overhead circuits is a little different. So I would say, yes, that's ongoing. But I do think there's a step-up in that program across the board. I think more so the regulator realizes that it's probably the right answer from a cost standpoint.

The -- you mentioned also the Southeast with the big storms and the need for steel and concrete. And we had Entergy on yesterday. And they talked about the 390 poles that were new get steel concrete, I forgot which one they were, were fine. And then the others -- many of the others came down, but I think they've got 17,000 probably wood poles that need to be replaced, like how quickly can that -- something like that be done? Is that a 10-year-plus project or just how feasible their time line would be to do something like that?

Look, I think any of it, it just depends on how quickly they want to -- I mean like it's feasible. If you want to do it properly you just -- you have to stairstep 34,000 poles a year is a lot of poles. So if you want to expedite them there, it's difficult, but we're working with them and we work with and do quite a bit on the replacements. And I don't think anything that they're trying to do now is certainly outside of what you would consider possible, and what -- the steps they're taking are the right steps to hardening that system.

Switching gears a little bit to -- I think we, at some point, mentioned electrification and EVs. How are you strategizing around that at a fall? Is it more just, all right, utilities are going to be selling more electricity and so we'll be working with them to do this? Or are you working with other parties that might be involved in the system of EV charging and how you might participate in that?

Yes. Steve, I think when you look at Quanta, I think we're enabling infrastructure to really mine and transform to enable EV or technology or whatever it may be. So whether it be EVgo, GM, it doesn't really matter. But we're trying to help not only the GM come on to the grid, but also help the utility enable that. So I think it's 2 steps. One, we're talking to all the charging people, doesn't matter who it is, and the manufacturer, whether it be GM or others as well as the utility on the backside. And I think what -- it's probably like a 25 to 1 in my mind, if they're spending $1 billion on EV charging. It's $25 billion on the backside of what it's going to cost for your systems. And I relate it back to your home. If you put load on a breaker in your home, it's going to pop. Well, that would not happen on a transformer. It's still a little bit different. You put 2 cars, 3 cars of EV charging, it's just different. I think that is the unknown of the distribution system. And if you can see the pace that we see on the manufacturer, it's substantial, forward out saying $11 billion GM what they're seeing. And I just see in a rapid pace and our ability to modernize its distribution system and it requires a redundant system as well. That's the unknown. And the industry is really working hard on to try to make sure that we can facilitate that.

It's an interesting point because I felt like the amount of CapEx related to EV charging that utilities are doing, still seems relatively small relative to renewables transition, things like that. So I guess the question is, are they doing enough to upgrade transformers and some of the basic stuff are going to kind of wait until the load is actually there and then do it.

Look, it's hard -- I mean I think it's hard at your utility to plan because it's been such intermittent. But what I would say, it's like everything else. I mean the sentiments there. It's moving forward, very similar to renewables, batteries. You kind of talk about it, talk about it and all of the sudden and tear and then they like to push this forward. What I'm saying is from our conversations would be the distribution level spend and the redundancy that requires, I think that's just starting and that capital is significant over the next 10 years to get it ready for EV.

And just so I understand, distribution redundancy that is things like just basically more of the blocking and tackling of adding more transformers or increasing the size or...

Which capability, switching capabilities?

Yes.

Just the modern system that when transformer goes out, you don't want the whole service to go out, so you're able to switch and do some modern things there. I just -- people are going to expect a different level when you start connecting your vehicles in and things of that nature. It's just going to be different. The load is going to be different. I mean if we have a high rise today and then all of a sudden, it's got x amount of load and it's got 200 cars and then they're all EV. Houston is a little different in Houston. So I think about it because we have 25 lane highways down here, some people that don't match transit. Where the city 25 cars is really going to be interesting $2,500. So I just -- we see a significant amount of load.

Okay. I'm going to ask one more question and then open it up to the audience for their questions. So please, if you have one, you can just type it in or e-mail me or chat me to ask. But maybe you could just talk quickly on the Blattner acquisition. And maybe more importantly, where you see your participation in renewables going from here?

Yes. I mean I think in the past, the company was really enabling renewables in many ways or almost anything. And I thought in my mind, while we were the interconnection transmission interconnection to substations that we're connecting to the grid, to the utility. We were saying no a lot on balance of plant and the things that are on the backside of it. And I started off by saying utilities, we're really doing 2 things in our customer base. And so every conversation we would have, whether it be even on our gas side and industrial side. That conversation was moving towards more of a carbon free. How do we get there? Can you build solar? Can you build renewables, on and on and on. And I felt like they're a 107-year-old company, their culture is the same as ours. They were North America's leader in building solar, wind. Where I feel like North America's leader in building transmission distribution for utilities. If we put it together. In my mind, we can really enable the transition -- energy transition for utilities and also our gas industrial customers on the backside. So in my mind, I feel like it's a good place for us to be able to collaborate with our client, which is both of us believe is extremely important for our firms and from a transition culturally, we marry up very nicely. And we're optimistic today as we were on the day where we said yes, and move forward. So we're excited about it.

Yes. Great. We have several questions here, so let me get going on those. So first one is how should we think about power margins and the potential for upside to power margins in this spending backdrop? And how impactful are storms to margins and EBIT as it's been another active storm period?

Yes. I mean -- look, utilization always helps the company. I think we're in upper levels of our margin profiles today. We did a nice job. We've always talked about double digits, 10% is where we sit in the power margins over time. That's been our historical averages. 85% of the business is kind of -- in my mind, we grow at double digits. It sits around MSA's long-term programmatic spends. We're growing people, our training programs. We need office leverage and I look at the company as a portfolio. And when we grow, it depends on growth. We did add our Puerto Rico. We're also running the grid of Puerto Rico. So that contract alone add some basis points to our margin profile. So I would say it's picked up a little bit. But in general, we run about 10%. Obviously, we've been running a little higher over the last few years. Can we do that over time? I'm not ready to get behind that yet. I still believe, over time, it's 10%, 10.5% business.

Great. And yes, the storm -- I mean I don't know if this is an unprecedented year for storms or this is the new normal, so to speak. But it's also not just hurricanes and fires, it's -- part of it -- we've had 2 of the Michigan utilities on, and they had the worst storms in Michigan in decades this summer. So...

We've seen floods too. New York flooded. So we have some gas distribution there, and we're doing things underground. So it impacts other places. And what you're pulling off other work to go storms, if you put 3,500 employees off other work into storm, you get some utilization, but you're also pulling off other work. So just incremental impacts there and you get some utilizations, but tough to say actually that.

Yes. How are you thinking about future M&A moving forward? And what are -- what would be the key areas of focus?

And the company is focused on -- in the past, I feel like we've done a nice job of getting away from large risk to EPC. We moved the company towards more consistent utility-backed spending that we can -- that we know very well, my background for generations in the business. And so we've stayed and become a consistent company for consistent earning streams. We'll look at those backdrops around craft-skilled labor. We've done a nice job of colleges and correcting on some things like that, that we own. And so anything that we can do around that going forward, we'll look at. We have a conservative balance sheet still, and we'll continue to keep it that way. Large family businesses that we understand. We're certainly inclined to look at. But just did the largest acquisition of the company's history. So we're going to digest.

Okay. And then have you been able to secure enough equipment to meet current expected workloads? And then on the rental side, are you having to pay more to rent equick?

Yes. On the equipment, we've done some partnerships there long ago and have really good relationships there with all the bigger firms on line equipment. So I feel real good about that long-term agreements that we've been able to grow the business nicely. We elongated a few lives on things. But in general, we've been able to secure equipment, not worried about that. And as far as rental equipment, we've been in good shape there as well. So in my mind, not a lot of inflationary issues are global or equipment.

Great. Well, I think that's all the questions we had. So Duke, before we wrap up, I want to give the answer to the question and then give you the floor. So does the Biden administration succeed in accelerating transmission growth? And 67% say yes. So we'll get through the siting and all the other -- the cost allocations and all that good stuff. And just before we go to wrap up, I'd be curious, when you're interacting with utilities, who are you mainly dealing with? The COO of the utility or the -- who are your people mainly interacting with?

We tapped the bottom typically on the utilities. It's everybody's got a role, and I think we all get in. And this depends on whether it's an integrated utility, how big they are, whether -- what they're trying to accomplish. But normally, it's top to bottom, especially nowadays on everybody's earnings is dependent upon capital spends and things of that nature. So we're very much involved top to bottom. And even on the transmission bills, which are [indiscernible] and I do think there's things that we can do to help benefit [indiscernible] we work hard at it.

Great. Well, I'll leave you the floor for -- to wrap up if you -- any final comments.

No. Steve, I think our macro markets are good. I think on the most part, utilities have come through the pandemic and all the industry itself has done a nice job of really moving forward and in order to enable the sentiments that you hear around renewables and EV and those things, I don't think the investor community nor really people understand how much the utility space has to do and the amount of dollars that's there to upgrade this grid and the impact that's going to have on that sentiment. So I just -- really good place, really good macro markets and the utilities are doing a nice job moving it forward.

Great. Thank you very much, Duke.

Thanks, Steve.

See you. Thanks, everyone.