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

Good afternoon, everyone. I'm Jamie Cook. I'm the machinery and engineering and professional services analyst at Credit Suisse. With us today, I'm very pleased to have the entire management team of Quanta Services, including President, CEO and COO, Duke Austin; Derrick Jensen, who's the Chief Financial Officer. We're also introducing Jayshree Desai, who's the Chief Corporate Development Officer at Quanta Services; as well as Kip Rupp, who heads the Investor Relations effort. So thank you very much for everyone for being here today.

I guess, Duke, I'll kick it off, starting on sort of the electric power business. As you look at 2022, how do you think about the composition of backlog growth you guys have made? Done a good job growing the O&M business, but I'm wondering if we could start to see the larger transmission projects picking up. And to what degree is labor constraining your ability to grow?

Yes. Jamie, thanks for having us as well. So sorry we couldn't be in person.

Next year.

Next year. We're looking forward to it. So the business itself, intact, we'll make it a point to say that we'll guide towards a $200 million storm year next year versus wherever we end up this year, which will be somewhere north of $400 million. So that being said, we'll start there. But the base business is growing, as we've talked about in the past, double digits. And I think that continues. The front side of our business, the programmatic spends, the things that we've been talking about are certainly inbound daily. And I think those things will continue to add to that base. So the business is in really good shape. And we see it long, long term for that nature. Electric vehicles are coming on and the renewables as well. So all those things add up. As far as large projects, yes, we see plenty of opportunity there. I do think they start stacking. We're starting to see some movement that have been 10 years in the making, I guess. And so stop and start, if that stacks on top of where we're at today, we are coming off the larger project in Canada, one of them. So that will be somewhat of a pull. But even with that and the way the business is set up, you'll still see nice growth within the business.

Okay. And I'm sorry, the one part on labor, are you concerned at all? I mean, one of the concerns I get from investors is sort of labor limiting your ability to grow the top line. Is that a concern at all? I know you've been investing in labor for years before everyone else did but.

I mean, I think that's our core competency, to some degree, is cross-skilled labor and the investments that we made 6 years ago. And all the things that we've done with colleges and with labor, with union labor as well as nonunion labor, trade associations, ourselves included, and the way we've built curriculum out and able to bring young talent to the field in a diverse way across a large skill set, just really pride ourselves. And when you think about organic growth of $1 billion next year or more based upon the dialogue that we're giving you, it requires 1,000, I mean, 3,000 to 5,000 people. And we're going to do that year-over-year, not just next year on a CAGR basis, we're planning on doing that for a long period of time. And we're giving dialogue out well past next year and saying multiyear growth. In order to do that, you're going to have to make those adds and those investments that we've made have set the platform for us to continue to grow that. And the labor constraints, while they're there, actually, it's probably a benefit for us, and I like it.

Okay. And then I know there's obviously a lot of secular tailwinds that your business should benefit from as you think about the world trying to move to sort of a carbon-free or carbon-neutral economy. I mean, we know all the long-term trends are there, but what are your customers telling you about sort of when the CapEx for those types of secular drivers start to inflect more positively? I mean, do you see a big step-up in change or do you just continue to see sort of moderate growth, I guess, over a longer period of time or do we see step function change?

I think you're in early stages of step function change. And in saying that, some are ahead of others, but I would say the vast majority have either started that change or significantly ramping capital to really transition themselves into a carbon-free environment. And when you think about it from a transmission standpoint, you're really talking about the interconnections of renewables or going from coal to renewables or even gas to renewables to some degree. And so that's there as well as the EV. And then I'll give you, for instance, on EV, when you start thinking about putting 2 or 3 electric vehicles on a transformer that was meant for 0, it's significant. It's like your home when you plug too many things in and the breaker breaks, it pops. You have the same thing on the grid. That piece of it is something that's underestimated. We talked a lot about the charging stations, but it's the incremental spend behind the charging stations on the distribution systems that as you start to see the OEMs with the vehicle manufacturers come out with the large builds and that starts to hit, that impact on the grid is significant. And it's a long term.

Okay. And then if we transition, obviously, the market really liked and including myself, the Blattner acquisition that you did. I know for 2022, I think you said you thought revenues, I think, would be sort of flattish. And I know there's been some, wind has been slower, then solar more recently has been having some supply chain issues, but can you talk to your comfort level with that? And then as you sit here today, I know you didn't embed revenue synergies, but can you sort of help us understand where the potential opportunities could be? And does this position you enough in renewables? Like is this deal big enough to make you sort of the #1 player on the renewable side?

Yes. I mean, I think when we looked at it, it's not about really being the #1 player. I believe we are. But that being said, I would say it's the #1 player in the energy transition of infrastructure. So when you think about it, it's really providing or enabling the infrastructure for this transition across a broad spectrum and making sure that we, as a company, are on the very forefront of that. And certainly, while we are building the interconnections to the load centers, now we're building balance of plant. The discussion is much different with the client, not only to discuss how they transition themselves from carbon to carbon-free, but also how do we move it to load centers and win and permitting and all the different things that we can do upfront. So those discussions are changing every day, and I do think the company has positioned itself quite nicely from a constructability review to many things that we're doing upfront with the client early to provide the utmost collaboration and also benefits to the customer on the end. So I really like where we sit in that transition. I think we've positioned ourselves in a great way for us to be early and also stay with the client a long time. And both companies, the synergies are there. We certainly haven't quantified them yet, but there's no doubt anything when you talk about hydrogen, when you talk about anything in renewable state, batteries, where Blattner sits in that value chain and how we sit as well and the 2 companies put together, I do think 1 plus 1 will equal 3 for sure.

How long do you think it'll take for the revenue synergies to materialize? Is it a 2022 story but not in your guide because it's too early or do you think it'll take longer than that?

Jamie, I'm impatient, so I would tell you Day 1, probably a day before Day 1, we were working on it. It's very difficult to quantify. And I do think they're there. We see them and we're working on them. But you have a big company that's growing as well so you don't want to get in the way of that growth and what you see long term. I mean, we see it. We've already talked about giving the $3.6 billion of guidance in 2025 for Blattner. So that being said, they've got some growth to do. And we can learn from how they're growing management teams as well. And both of us put together are starting to grow out our project management capabilities, our capabilities on renewables, those synergies are there. You'll start to see them underneath. We have to build this organization around those things to make sure that we can quantify it and give you more feedback on it, but there's certainly, certainly seeing signs of that. But I don't want to talk about it. We want to put the numbers up. And when we put the numbers up, I'll start to talk about it more and more. But to me, it's all rhetoric until we put the numbers up. And certainly, when we put the numbers up, we'll talk more.

Okay. But we won't guide to that, right? We'll keep it conservative. All right. So Derrick, you've been quiet, so I have to ask you a question. I feel like, so on the electric power margins, obviously, the margin performance has been great this year, and you're towards the higher end of your margin guidance. Usually, as I think about the next year, I know what you're going to tell me, not sustainable. We're executing, mix, a bunch of different things, but we have Blattner in the mix, too. So can you just sort of, and we have Blattner in the mix, which is a positive. We have large projects, which could be a positive, potential utilization, which is a positive. So can you just sort of help us think about electric power margins and the sustainability of being towards the higher end of the range?

I think you definitely commented about all the things that are true opportunities for us. You are right that, I mean, although we're not in the spot of guiding for '22 yet, it's really hard for us to look past the historical margin performance of the segment. The segment, on average, before the contribution of Puerto Rico, has averaged at about a 10% operating income. We have periods of time probably within '20 and '21 where we saw some nice margins. And I think that emphasizes the opportunities that you speak to. And we continue to think that we can see those opportunities, ability to execute through contingency and the like, nice contributions of storm work in '20 and '21. But I would say that likely, we'll be basing it off the historical averages as we start clearly from a prudency perspective. The equity in earnings component of that will come into play. We've commented in the past that's about a $0.25 contribution. That gets the margins of the segment to around that 10.5%. Then relative to Blattner, actually, Blattner is quite complementary to our margin profile, right? They're pretty much in line. They had in recent years seen an uptick in their margin performance, similar to our own in '20 and '21. But again, they also have, on average, executed about that double-digit performance. So I think that they will be a very consistent additive to it and giving us even a longer, more confident visibility into a double-digit performance, 10.5% with the equity with still yet with an upside potential to that. I think that all the things that we're positioned around are strengthening positions, but we have to recognize that we work in an outside complicated environment. And being prudent relative to execution is always important.

Okay. And then, I guess, Duke, just because you mentioned LUMA and the $0.25 of earnings contribution over the long term. Can you just help us understand how LUMA is going relative to your expectations? And I know before when you first announced the relationship with them that you thought there was opportunities outside of LUMA and Puerto Rico. So just wondering how that market is sort of materializing.

Yes. I mean, I would say, in general, when we think about it, underneath, we're doing a very nice job. The team that's there is performing well. I believe we had a 25-year record last week on how many people were without lights, which is under 100. So that being said, very nice. The rhetoric and then the press sometimes gets a little noisy. But in general, I would say we're performing well. The opportunities for us to build on and the funds coming in over the next 10 years is there. So most of that, lots of that will go into engineering. We already started some engineering and start to go out for projects and be bid on just like any other bid next year. So I do think at some point in the late half of '22, you'll start to see projects start to materialize there on the island and be meaningful probably late '22 and '23 as it starts. So that's the way we see it today. Really like the island and like what we're doing on the island. And I do think it allows us to get on the front side with all the utilities around, talk about planning, talk about what we're doing and seeing in the markets, too. It's a proof of concept as well for Quanta and what we can do. So I do, we take it very seriously and making meaningful change for people on that island. So we're proud of it, both personally and for the company.

Okay. And then just obviously, strong secular growth tailwinds, but we also have an infrastructure bill that was recently passed. So any insights from your customers in terms of when we should see those dollars start to move? And I guess as you think about where the dollars are being spent, from an M&A perspective, do you see any holes in your portfolio that could sort of, you could shift into an adjacent market that you're not in today?

Yes. So I think when we think about the plan and we look at it, I think the policy around tax credits on renewables, things like that, certainly benefit everything that we're doing from that standpoint. So those things matter. The dollars that are flowing in, there's some transmission in there. I would just say we have 2 customers that probably have a bigger capital spend over the next 5 years than what they've put in for transmission. So it's not necessary for us to have that money come in. But the sentiment around what's going, Jamie, in Build Back Better, all those things, and we have great platforms for growth. I mean, we see growth in '23. We see growth in '24. We see growth out for a long period of time without acquisition, but the company itself is entrepreneurial. We certainly believe that as we look at capital allocation that M&A will be a piece of it. And we have, I think, a wonderful strategy to provide the ultimate impact to the shareholder by some form of acquisition at times, and we'll lean into it when we see the right place to deploy it.

What about on the communications side? Obviously, that's still sitting within the electric power business, but I think the strategy historically has been to grow that business organically. Given what you see ahead, is organic the right decision going forward or would you consider M&A to make you sort of a larger player there?

Yes. I mean, it depends. So I think in general, if you think about what we've done there, we've organically grown. We consistently believe we can grow a $1 billion platform plus. We've got some stops and starts. But in general, my concern always with our communications group is the carriers themselves stop and start their capital spend. And I'm wary to continue to deploy a significant amount of our free cash in there when we can go to more consistent-type platforms. So will we look at regional areas that could add value? Yes, but I don't think you would see us making some large transaction in that area at this point. But I do like the business. It's adjacent to us, and we can grow it as fast as we want, honestly.

And I understand you can grow it at a fast pace and you're growing off a smaller base, but like any indications on how you're thinking about CapEx for 2022 on the communications side, wireless broadband? Is it back half loaded? Like what is your expectation?

As far as us, I do think that, yes, I mean, we'll be pretty consistent. So we'll be pretty consistent about how we think about it into next year, but the back half is certainly stronger than the front when I see it in some of the builds that we have. We did start some wireless business. It picks up incrementally throughout. So I like that piece of business. And we've got tons of opportunity there. We just got to execute on it.

Okay. And then, Derrick, I feel like I always have to ask you this question this year. So as we're thinking about 2022, and you know I like to add and subtract things to figure out like what the base of earnings are, so we properly set, think about ourselves. So obviously, we get the $0.80 to $1 from Blattner. We get $0.25 of LUMA. There were some one-offs that theoretically go away. Is there anything else we should consider as we think about the base of earnings in 2021 going into 2022 that I'm missing?

No. I think those are probably the bigger adds and subtracts. The rest of it obviously comes down to kind of how we think about margins. We've already spoken about electric power in the probably 10.5%. It's important maybe to think about that, I'll remind everyone that we're evaluating how we would lay out segments, Blattner as an acquisition. We're evaluating how we'll position it. So it may or may not be within an electric power. Blattner may, in some form or shape, allow us to rethink about how our revenue positions are, maybe doing a renewable solutions type segment, but we're evaluating that. So some of these things may shift around. I do think that underground has got room for improved margins. That's very much a component of the equation. As we've been executing in '21, industrial has been basically a kind of a breakeven proposition within the last 2 years driven by COVID. I think that it allows for a degree of rebound into '22, giving us an uptake potential in our margins. I would expect our underground margins will improve in '22. We're not in a position quite yet to quantify that, but I do think it will improve. So that's something to keep in consideration. One other cleanup item I want to make reference to is that on the Blattner side, they've historically operated at double-digit EBITDA level, been on operating income of kind of 9% to 10% range. But look, overall, I think that it's a year of continued growth. I think we continue to see strong margin performance. And I think that from an EPS perspective, I don't think we're pretty comfortable saying that $6 will be in our range, and we'll have to be looking at how we think the pieces come together.

Okay. And then, I mean, you talked a little about underground utility and infrastructure, but the margins there obviously have room for improvement. Duke, I mean, can you break apart besides Stronghold, we know it's breakeven. But like your business model is to focus on businesses that have steady growth, right? And you think about a Stronghold, which is industrial and then sort of cyclical. I'm just wondering, I guess, bigger picture, are there pieces of the portfolio that detract from Quanta because it's sort of the old Quanta that was more cyclical relative to the Quanta that's emerging today that is more secular growth focused?

Yes. I mean, look, we always look at these portfolios and try to make sure that as a whole that we're operating in my mind the most efficient we can in deploying capital where we need to deploy it. I do think you're going to see a real nice year out of our industrial business next year and beyond. And so when you say, when we think about it, when we think about going beyond, I really like where we're set up there. And when you start thinking about hydrogen and how that's going to deploy into the things that we're doing there, it allows us a lot of different capabilities on the hydrogen side of the business that we don't have to invest in at this point. We've already invested in it. We already have the skill sets to do those things. So while it may look like an industrial business, there's a lot more to it. And I'll just say that I like where we sit. We're a critical path. I do think we'll have a nice year next year in that business. And I like it long term. The management team is fantastic. And we like the positions that we're in, Jamie. I mean, I think if you think about the company, it will be very close, if not, over $16 billion next year. We'll have really nice margins in the business with growth beyond. And we're focused on next year, I'm focused on the next 5. And I see a CAGR-based business on the base business. I see long-term growth patterns, macro markets and every single sentiment you can talk about from an investor. If you're investing, you want to talk about renewables, AI, self-driving, driverless cars, batteries, just name it, and we're right in the middle of it from building the infrastructure that enables all that. So when I was on a call with Analog Devices 2 days ago, we complemented everything we said. It was almost, they were trying to do some technology things, we were on the other side of it. So literally, I think we're right in the middle of this transition and where we play at a very high level. So really like where the company is sitting.

It's also worthwhile, remember that relative to the group overall, remember that we use oftentimes assets there over on the electric power side that are complementing the growth of electric power when you're looking at undergrounding of electric and the various dynamics there. So the margin profile, we still look at it on a portfolio basis because many times those assets are being utilized in the electric segment. You may not just see it from a reporting perspective.

Yes. And that's helpful. But how much, Duke, I remember us being on the road a couple of years ago and part of the issue within that business was from the recurring revenue base or the O&M side, you just didn't have the scale. I mean, that you theoretically had and you sort of, I think, needed greater geographic diversity. Is that still an issue or no?

I mean, I don't think you hear us talk about, hey, we're training people in our offices and those kind of things anymore. I mean, the margins are the margins. I look at it on a holistic basis where we're looking at kind of how we operate the more mature operations that we have in the field that have electric, gas, telecom, even industrial in places that are operating in with all functions are operating at high levels. So we need the operating leverage and we will continue to see the company move those margins holistically up because, as Derrick said, you're going to see the LDC business margins and the margins move up. And it's going to move up due to the fact that we're getting scale out of these offices at the operating level and how we're running the company in a holistic manner. I know we're talking about it in a segment, but we're thinking about it of how we operate very much at an operating level as a portfolio. So I know I've said that all the time, but you are starting to see those operating margins holistically, whether it be you see electric moving up or electric may be moving up because we're doing undergrounding from gas crews building telecom and electric. So I don't care what they're doing, honestly. We're trying to utilize those assets and get the most value out of them.

Okay. And then, I guess, just last because I think we only have 2 or 3 minutes left. Quanta, the stock has been an amazing stock. You've obviously had a nice re-rate as the market is finally appreciating the secular growth that you have ahead. But Duke, is there anything that you think or the team that the market misunderstands still about Quanta's story even with the re-rate that you've had?

I just think our macro markets and where we sit and the way that we've developed the cross-skilled labor and also the solution-based approach, the collaborations that we have with our clients and the transition, the energy transition that we have is underappreciated on a long-term basis. And so when you think about it long term and where we sit with technology, with the way we're enabling things, I mean, you can take Squid Games in Taiwan and say, will they see Netflix because there wasn't enough infrastructure. So we're 1 day away from some technology advance to be out of fiber again or whatever it may be, but we're sitting on the pendulum of that, in the sphere of that. And then Blattner gives us a lot of capabilities to help develop people's plans going forward. So in my mind, the company is strengthening our capabilities as we move forward. And to put top side growth on it would be, I'd be remiss, I think the future is very, very bright, and we continue to grow the bottom line quite nicely. And I think you'll see that for years to come.

And are you worried at all because of the growth drivers that you see ahead, new entrants into the market or bigger consolidation to try to sort of copycat you and how far ahead do you think you are with the competition?

Many have tried, Jamie, and just it doesn't bother me a bit. I like competition, keeps us stronger, makes us better.

Okay. All right. Well, with that, I think we're out of time. As usual, guys, I truly appreciate your support. Hope you and your family have a wonderful holiday. And I'm hoping next year, we will be in sunny Palm Beach. So thanks again.

Thanks, Jamie. Thanks for the time.

Thanks a lot.

Thank you. Great job, guys.

Thanks.