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

Good morning, everyone, from New York. I hope you all have enjoyed the conference so far. My name is Fahad Nadeem, and I'm on the energy services research team at Goldman. Today, I have the pleasure of hosting Duke Austin, CEO of Quanta, leading specialty contractor that plays a critical role in the energy transition and in maintaining and improving America's infrastructure. So Duke, I'll pass it on to you for any opening remarks, and then we can move to the questions right after.

Yes. Thanks for having us this morning. So Quanta in general is a leading infrastructure play for -- around utilities, telecom, all the new things from technology to anything that's enabling the internet, enabling new solutions, primarily around craft skill labor. So when you think about Quanta, it's all the -- all the infrastructure that enables -- all the people that enable infrastructure. The modern infrastructure is necessary for renewables, for technology, for all those things. So when you think about it, we're facilitating all the different areas and all the different things around the internet or the carbon-free footprints, hydrogen, whatever it may be. We're right in the middle of all those things, enabling that infrastructure. So in providing those solutions in a collaborative manner to our utility customers, our telecom customers and also the industrial base as well as renewable developers with the acquisition of Blattner.

Thanks, Duke. So then let's jump right into it, and let's start with the near-term outlook, beginning with supply chain and labor. So can you talk about Quanta's performance amid these issues? Have some of your customers delayed project activity because of rising materials costs? And on labor, can you give us a sense of how much personnel costs have increased on your end?

Yes. I think when you think about the supply chains that we're in, most of our utility customers have long-term agreements that really allow us to continue to build that infrastructure out. And so we're not seeing the constraints there. I will say some of the larger solar -- utility-scale solar projects, there was some movement in it, but it's not material in our mind and the guidance that we've given around $2.6 billion, $2.7 billion on those type projects certainly is intact, and we're still seeing that supply chain. In my mind, it will stabilize -- it is stabilizing and which will allow it to move. And as far as labor, certainly, labor is tight. I think Quanta has prepared itself in such a manner that will allow a tight labor market to benefit us and not hurt us going forward. So in my mind, we're not seeing wild escalations of labor, and we're able to certainly meet our customers' demands on time, on budget with the labor that we have. So labor shortages, in our mind, are not a bad thing, and we've set the company up really to prepare for this.

Great. And just a follow-up. I mean as far as your customer base, would you say that kind of the delays in project activity, the issues -- any of the supply chain-related issues, do you think that those skew a lot more towards the smaller players, like as Quanta relatively insulated partially because of their customer base as well? Or do you think it's an issue that's affecting kind of everyone similarly?

No, I think you saw it with COVID. I mean the company is resilient, and we were able to perform very, very well throughout, in my mind. So I think having scale in the business, having scale with developers, having scale with our utility customers certainly allows us some advantage when there is a product or 1 job or something small that it's delayed, we're able to certainly move to other projects and to other areas within the customer base. But the utility customers that we have, which is, call it, 65% of the business plus, certainly stable within the supply chain.

Got it. And then 1 more follow-up on labor. So is there a point at which availability could become a long-term issue, perhaps if revenue growth exceeds expectations materially over the next few years? Can you give us an idea of how much top line growth and resulting hiring and equipment needs Quanta is scaled to support over the next few years?

Yes. I mean I think, in our mind, we've talked about growing the business. Certainly, EPS at double digits. We always talk around 85% of the business being the base business and our ability to grow that high single digits is certainly there for us. And we see that long term. The macro markets are there for the growth long term. We've already talked about Blattner and giving guidance out past 3 -- to 2026, around $3.6 billion. So I think we've given those numbers out and the strength of the company and the strength of what we can do and grow. We have different -- we -- the colleges, the line colleges that we put together, the telecom colleges we put together will certainly allow us, and our labor pools as such, to meet the demands of our customer base.

Great. So let's shift gears a little bit and talk about electric power. So can you talk about sort of Quanta's structural advantages as a business relative to competitors? What are the key differentiators that drive Quanta's significant revenue lead over peers in electric T&D? And then what could help Quanta continue to drive growth potentially above market rate, above the rate of U.S. electric T&D CapEx?

I mean I think from our standpoint, when you think about Quanta, really, we give our customer, in a collaborative manner, we really try to collaborate on their future and work with them in a manner that they depend on us to build on time, on budget for their capital needs. And so in saying that, it really has allowed us to take the company to a different level to where we're sitting, looking at long-term projects and long-term programmatic spend versus one-off projects. You used to go back and it would be 50 poles, now it's 5,000 over 5 years. And so it's just different. And we've also talked about the programmatic spend and how we would get in front of that with our engineering capabilities, all the things on the front end of the business that will allow us certainly a different look and also to be more predictable, more certain and build the project on time. I mean I think our customers depend on that for their own earnings. If they can't deploy capital, then their earning streams are messed up and utilities typically want to hit their earnings and be extremely, in my mind, resilient to the earnings. And so that being said, they can't have mishaps, they can't have misses, and they depend on 2 things right now really driving the utility business is primarily the fossil fuel switch to renewables as well as capital spends on T&D. And those capital spends are very large in nature. And certainly, our ability to get in front of those and help them with their budget just would separate Quanta from others. And I think if you've ever built a home and then -- and the -- the contractors don't show up and the homeowner says, "Oh, well -- the builder says, "Well, I can't control my subs." We've really done a nice job. We self-perform over 85% of our business. So it allows us certainty. And I think that's the big key and what separates us is that certainty.

So sticking with electric power, can you talk about the degree of stability that we should expect for electric T&D financial performance in the face of macro issues such as new COVID variants or more hawkish Fed, for example? And can we expect a lower degree of cyclicality in earnings and revenues growth next year and beyond because of the nature of your customer base?

Yes. I mean I think we've set the company up long term to be resilient and to be able to be predictable, certainly. And I do think given the macro markets and what we see out there, our ability -- and we've already talked about our $6 EPS number, going into next year, be in the range. So I think, in my mind, we're giving guidance out and also saying that we can grow it. So I think that's the -- from my standpoint, it shows our confidence in what we see in our macro markets and we continue to separate ourselves from others in the market.

Great. So then let's shift a little bit to the communications side of the segment. You've cited $1 billion in revenue as an achievable near-term target for the business. With the 5G rollout, do you see this figure achievable as a run rate in 2022? And could Quanta see ongoing double-digit annual revenue growth for communications beyond that $1 billion target?

Yes. I like the market. We've said that we were around $650 million this year in telecom, and I do think it has some growth to it. There's other areas of the business that we would deploy resources as well. So to say we'll be at $1 billion, there's opportunity certainly there. What we're really trying to do is leverage our resources to where gas crews can build telecom or electric, so underground to underground. And, in my mind, get operating leverage at the fill level where we're unique, and we have great leadership and teams there that will allow us to do that and not be so focused on telecom versus gas versus electric underground as long as the sum of the parts are increasing, like we've said, we're growing about 85% of the business, double digits, with very, very good margins. We want to go where we can build the best return for our shareholders, more so than what type of business it is. But I do think the macro market in 5G and the telecom business, we really like it, it's certainly growing and we're going to pace it to where it's the quality of the earnings versus the top line.

Got it. And actually following up on the point of using labor from the underground utility segments, moving into communications. Can you just talk about Quanta in general, like how sort of fungible is -- are the labor resources that you have? Can you reasonably -- if there's more demand in one of your end markets, is it easier? Is it easy enough for Quanta to be able to shift labor resources abroad? And then also geographically, I mean how much flexibility does Quanta have to move those labor resources around the nation?

I mean, certainly, that's one of our strengths, is our labor force and our ability to have equipment and buy equipment, have good suppliers that are with us. And when you think about it, like a bore rig can bore telecom, electric, gas, it doesn't matter. And really, it doesn't matter until you get to the skill set of the craft. So a lineman, for example, can do some telecom, but a telecom person can't do electric. So there is some dynamics that come into play. But typically, for the most part, we're able to transfer resources back and forth across service lines, which certainly gives us some advantage.

Great. So then let's take a step back and talk about -- so the grid -- the electric grid hardening and modernization story, that's a big driver of this segment, has existed for several years. But it seems that interest from the investor community has inflected over the past couple of years, and we've certainly seen that in Quanta's stock price. So what do you think are the key factors that sparked this shift in interest? And how do you see this interest sort of progressing going forward?

Yes. I mean I think when you look at it and you look at the grid and then you want to -- we're going carbon-free, now I think that ship has sailed, we're moving in that direction. In order to do that and able to add the transmission system, the modernization of the systems, the distribution system on electric vehicles. So if you want to put electric vehicles on the systems, they're not set up for that load. So when trying to modernize them, we're just starting those modernization programs to handle the load of EV or to make sure probably, call it, plus or minus 18% renewables today, maybe, maybe a little less. So you've got a long way to go to get carbon-free there. And in order to do that, all the infrastructure that we're -- the solutions that we provide around that infrastructure will enable that technology not only with EV, but with those renewables. And I think we're in very early stages of that modernization.

Great. And just sort of another question kind of thinking longer term. There's certain long-haul interstate transmission projects, multibillion-dollar transmission projects that -- I mean most have not broken ground yet, but they may be necessary to bring a lot of planned renewable capacity online. So can you talk about kind of the -- that opportunity set maybe even later into the decade, kind of the regulatory concerns that are there? And what is kind of your outlook on the chances of those opportunities coming to fruition? And then also the competitive outlook on sort of if Quanta can win a lot of those projects?

I mean we certainly see large multi-million -- $100 million, close to $1 billion projects out there. They're there. They're difficult in many ways because you're crossing federal lands or you're crossing people's right of ways. And so that certainly gives us -- it takes a while to get those things off the ground. So the regulation there around FERC and the things that they're doing and the administration, if we're going to press towards 2030, 2040, in a renewable state, there's no doubt that the transmission corridors have to enlarge and in a significant way to move wind, solar, sun to the West, East and have a very -- in my mind, grid that's resilient as well as that's modern will enable those things. And today, we don't have that. And that's a big -- something we see. As far as Quanta and our competitive position on it, when a larger project comes up, I think, in my mind, we will price it -- we appraise the risk, we get it right. We certainly had a reason to believe that what we're able to value with the customer, the value we provide and the certainty we provide separates us. And I like our chances, always.

Great. And -- so talking now a bit on kind of the margins for the electric power business and even the communications in terms of their comparability. I mean Quanta's talked about maintaining at least kind of that 10% -- a little bit over 10% margin is an achievable rate. Is there -- what are kind of the puts and takes as to that going up or down? Like is there -- like how can that 10% level be protected from new competitors coming in? And then the upside for that, is that primarily -- if there's more emergency restoration services? Or is there -- are there longer-term trends that could shift that stable margin through cycle margin upward for the business?

Yes. I mean I think we've talked about it in length, the business over a 20-year period. If you just think through it for 20 years, you might have had a 9.5%, but you had an 11.5%, it would average out around 10% over a 20-year period. We're certainly in good markets today. Puerto Rico adds another, call it, 10.5%, willing to say 10.5% because Puerto Rico comes in from an earnings stream standpoint. And the upside past that, we caution everyone and say, yes, there's opportunities for us to be fully utilized to make -- our training costs are showing up in the fill, we're getting more productive. Those type of things are certainly there and certainly afford us the opportunity to the upside like you've seen this year and last year. So there is opportunities for us to earn up. We're still a business that has to go out and perform and execute. And we're comfortable at 10.5%. We've talked about it a lot. Past that, we need to earn through contingencies and earn up.

Great. And then sort of last question on electric power. Do you feel that the investment community is still underappreciating the long-term financial opportunity in T&D for Quanta, whether on an absolute basis or relative to competitors? And then can you give us an upside case as to how large the opportunity could really be through the decade, especially if you start to see stronger regulatory support?

Yes. I mean I guess when I look at it and I think about where the company is at, our revenues next year would be very close to $16 billion. I think we've done a really nice job from where we sit. We've shown growth at the EPS level, at the return on invested capital level, growth to the shareholders. In my mind, the runways in the macro markets are there for us to continue to do so over a long period of time. And so we'll certainly deploy capital in the proper areas and the way that we're valued should be the way that we performed. And when I think about it and how resilient the company has been and where we placed it on a go-forward basis, in my mind, the upside of the value has not been seen yet because long term, we can still continue to do what we've done and grow our EPS. We've talked about growing our EPS double digits if you use all the balance sheet as well.

Great. So now let's move to Blattner. From your last earnings call, it seems that the strong growth outlook over the next 5 years or so, as you mentioned, is in the [indiscernible] of an acquisition presentation's impact despite near-term supply chain issues. revenue expectations are at $2.5 billion to $2.7 billion in 2022, potentially over $3.6 billion by 2026, implying a double-digit CAGR. So can you talk about the split first between the wind and solar businesses within Blattner today? And how you expect both those businesses to evolve over the next 5 years from a revenue growth and customer base perspective?

Yes. I think when we looked at Blattner, we took a prudent approach to it. We see a long-term macro market there to both build solar and wind. So when we think about it, we're really talking to custom about megawatts, and it doesn't matter. Like our crews or superintendents, our teams can move really from wind to solar, solar to wind at times. And we're not concerned so much on what we're building, more so is like where we sit with the customers early. So we're really collaborating with them to make the projects better for both of us, more economic for the customer and for us to make sure that we are providing them with value upfront. And so it allows us a long look. And I do think our scale there, like we stated, we run 30-plus large utility scale renewable projects, whether it be wind or solar. For us, it doesn't matter. There is some curves. You'll see more solar now and they don't go to wind because of the way the curves were and the grid. So you are seeing some of that. But for us, really, we're concentrated at a customer level, both wind and solar, it doesn't matter. The margins are as equivalent.

Great. And so on the topic of margins, I mean there's -- you've kind of guided to at least sort of maintaining that double-digit margin rate in the long run, which -- I mean especially if you just compare to even as general construction peers, it's higher. And so as -- like are there sort of characteristics to this end market that allow a company like Blattner to be able to maintain that double-digit margin in the long run? Or could there be new entrants that come and kind of bring that margin lower, especially as sort of growth shifts towards potentially new sub-end market in solar?

So I can just give you my take on it. Quanta tried to enter both solar and wind we felt. And the reasons we felt is it's very difficult to get scale. So the new entrant trying to get scale in the market is something that -- people will come in and they will do some solar projects. But where I see it being different, where we differentiate is, we can be consistent and our teams can move from one to the other, and it allows us to be much more efficient at the client level and also -- look, we have a very, very good team and Blattner's a 107-year-old company that I believe they're world class, the best in the business, and it allows much like we are in the transmission business. The customer base understands. And we bid competitively all the time. If people want to enter the market, they certainly can. Large transmission, I'll just go back and say the wind projects we've lost, the people that have won them, that hasn't been pretty. So that being said, we're going to -- we know the markets. We know what we're doing, and I believe our customer base relies on us, and I feel confident that no matter what -- who the entrant is, we can certainly continue to perform at the levels we have in the past going forward or better even. And I do think there is opportunities for us to beat all the things that we've talked about. We're trying to be prudent about how we talk about the future. But certainly, what we see and what we strive to do is much greater.

And let's dig a little deeper into kind of Blattner's market position and the competitive landscape. So when you think about sort of the other players that Blattner is competing with, the other contractors you've mentioned, people try to enter -- try to be entrants, but then there's difficulties with execution. Are there other differentiators besides kind of the execution that drive Blattner's market leadership? And then on the customer side, the sort of project awards where they're coming from, are you seeing the customer base kind of evolve, either in solar and wind, in a way that Blattner is better positioned to kind of take advantage of?

I think when you look at the acquisition and look where Quanta positions itself in the market, both from wind, solar and T&D, I think the combination of what we can do at the client level together, that synergy alone is what really differentiates us in the market and also just thematically and where the country is going. So if you're really trying to enable yourself in a carbon-free environment, enable those solutions, we're in front of that and able to really help the client go to where they want to go from sustainability and environmentally where they're trying to move. So it allows that kind of look. And I do think that advantage for both companies and how we go about the collaborative nature is certainly, in my mind, differentiates us from everyone.

Great. And -- so are there -- are you seeing kind of a growing opportunity set for now Quanta plus Blattner and kind of integrated projects? Is that sort of integrated between transmission and renewable generation? Is that something that is an opportunity that's growing?

I mean I think if you're a client and you want to talk about like to 1 person and it makes perfect sense, and we're certainly able to handle both. So I do think those conversations are ongoing. Our utility customers are certainly asking how do we think about solar, wind builds. So all the way, it just gives us a large programmatic way to look at things versus one-off. And I do think it does matter and will matter for a long term for us to provide the unique solutions that will enable the infrastructure necessary for carbon-free environment.

Great. And -- so also on Blattner, I think another kind of element of this acquisition is that just by the nature of the end market, there's a greater share of fixed price work -- fixed price contract work. And before the acquisition, Blattner had a pretty spread mix between fixed price, unit price and cost-plus contracts. As sort of Blattner kind of shifts Quanta towards the fixed price end of the distribution, how do you ensure that mistakes of the past for the industry aren't repeated, right? Fixed price contracts, that could potentially come at higher margin, but then at higher risk. How are those risks managed?

I mean I think both companies, Blattner especially, we have a really good relationship, like I said, with the clients. And we know the risk of the markets, and I think that's the unique piece of Quanta, both geographically as well as service lines. And certainly, the fixed price nature, we've showed our ability to perform. I think, in our mind, we're happy to have fixed price contracts. We do very well on them over time. And the large losses that we've had in the past are not that great. And then over the last 5 years, you can count them on one hand, and it's -- once we moved out of LatAm and in our service lines that we perform today and in our backlog that we perform today, we have a very good impeccable track record on producing the highest margins in the business with very, very little downside risk to it. So we really like it long term.

So -- great. So I mean is it -- I mean looking -- going forward, do you kind of -- I mean just a quick follow-up is that do you have kind of a target? Does Quanta think about it like a targeted distribution between the amount of fixed price and non-fixed price contracts that they have? Or is that kind of becoming less of a concern as the company just kind of goes towards where the opportunity is?

Yes. The only thing we've ever been concerned with contract type is pricing the risk. And I do think that the risk that are there, we certainly work with the client on them, do you pay for them? How do you want to handle [ ROIC ]? How do you want to handle [ weather ]? How do you want to handle matting right away? Those type of things are how we collaborate and really mitigate risk for both sides. Certainly, if we take the risk, we're going to price the risk. We have before. And I think our self-perform capabilities -- Blattner's self-performance is about 85% as well. So that really derisks most of what you would see from a subcontractor standpoint or things like that. So we're able to really price it internally with our own labor, and it gives great comfort that we derisk any kind of lump sum project.

Great. And then last question on Blattner. Can you talk about the opportunity with energy storage? Like how are the growth prospects for stand-alone storage projects and then for integrated offerings with wind or solar?

I mean I think we're seeing more integration, both wind/solar batteries. I think you'll continue to see, that makes sense. So you're going to see clients go that direction. We just performed on the Quanta side and built the largest stand-alone battery in North America. So our ability to build out under the Blattner platform or even the Quanta platform, we're certainly in the middle of that. And the way we look at charging stations, batteries, storage, all those things, we're enabling about anything you can talk about when it comes to infrastructure.

Fantastic. So let's shift gears towards the underground utility segment. This is the more cyclical side of Quanta's portfolio, but it has a few different types of business that each have their own kind of macro characteristics. So first, can you talk to how investor should think about the oil and gas pipeline, the gas distribution and then the downstream industrial businesses from kind of a cyclical perspective in this segment?

Sure. So I think when we think about the business, one, we're really working, like I said before, on a portfolio in the underground side of the business, whether it be gas, electric, telecom at the local level. We're certainly working on that. And in my mind, that is something that we will continue. As far as the industrial business, we do think the demand of COVID and those type of things on airlines affected it. We are seeing, as we come out into this year, greater demand and we said that. So we do like the industrial business long term. That's there, we'll be there. So we like that piece of business. As far as the LDC business, at the utility side, the methane releases and the gas replacements are there and continue to see long-term contracts, it's very resilient. So that's doing well. We are getting the uplift in margins. And going forward there, we like that side of the business. What we have said is the large diameter pipe -- look, there is some carbon sequestration jobs. There's all kinds of things around it, but it's not something we've invested in. We've said $300 million to $500 million is a way to look at it. Can we do $1 billion? Can we do $1.5 billion? Sure. Is it something that we're going to invest in long term? No. But we want to make sure that we can build for the client and enhance the margins there on the segment. And that's what we're really after is, not only at the segment level but at the company level, to make sure that we've enhanced our margins in totality.

Great. And actually the follow-up on the -- some of the opportunities that you mentioned for the segment outside of just energy or oil and gas. Can you discuss kind of the opportunity set for hydrogen and carbon sequestration in the segment? And then what types of projects could Quanta be involved in? Do you have a sense of when we could see some of these opportunities flow into the P&L?

Yes. I mean I think you're seeing opportunities out there. Now how fast they go, certainly not something that we're looking at. I -- in my mind, we're opportunistic in nature. We really are not talking about those type of projects. I will just say $300 million to $500 million. They're there. We'll be around the edges on them, but it's not the way I would invest in Quanta. I would invest in Quanta for all the other things. And that will be gravy in my mind.

Got it. That's helpful now. So now let's shift gears and talk about federal infrastructure spending. So with the passage of the Infrastructure Investment and Jobs Act and then, of course, the pending Build Back Better bill, which is in limbo, we're likely to see a significant increase in federal spending and incentives tied to broadband access, potentially solar and wind generation and electric transmission. So can you help us frame the implications for this legislation kind of on a segment-by-segment basis between electric, T&D, Blattner and communications? Would we see direct revenue opportunities for Quanta that are incremental to the current expectations in each of these segments? And is there opportunity for support on the regulatory side as well?

Yes. I mean I think when we saw Build Back Better, certainly, it's helpful, in our mind, but it's not necessary. So I think the sentiment around renewables is sentiment around carbon-free, all those things, where the country is going, is going regardless of Build Back Better. The transmission piece of the plan was about $70 billion. We have 2 customers over a 5-year period with the $70 billion kind of capital spend. So that's just 2 customers. I -- we like it. We think there's certainly ancillary aspects around it. The [ art of money ] and the telecom piece of it is significant. So that will drive that piece of business for sure. The other piece is really is ancillary stuff, but any kind of money flowing, any kind of regulatory relief around corridors, siding, those type of things would expedite the pace of infrastructure.

Got it. And so I think we're coming up close on time. I do want to ask you about kind of the capital allocation strategy for Quanta. What's the strategy, the long-term sort of outlook on return of cash to shareholders? Do you have a preference for share buybacks versus increasing the dividend over time? Or is there a preference, at least in the near term, to deploy cash towards M&A, potentially, even with the larger acquisition last year of Blattner?

Yes. I mean we're certainly going to get the synergies and digest Blattner. We continue to make bolt-on acquisitions or look at all types. That's something that we do. We're not out pressing for acquisitions. But if the right ones come about, we'll look at them as we deploy capital. We certainly -- M&A has been something that I think the company has done a nice job of, and we've been able to provide nice returns to our shareholders. So that's kind of priority one. We certainly look at our stock buybacks and our history there, and we'll continue to try to stay, in my mind, at parity to where we're at today from a share count and -- at least, and we'll also lean into buybacks. The dividend, we've been growing it kind of -- it's small, but growing, and we'll continue to do that. So we like how we've deployed capital in the past. I think the difference is we're not -- we can get the growth off the platforms that we have without, in my mind, making acquisitions. So we don't give guidance forward saying, "Oh, we're going to make X amount of acquisitions." What we will say is that if you give us the balance sheet and able to deploy capital, we can grow the EPS line double digits.

Great. So thanks a lot, Duke. Look, do you have any other closing remarks you'd like to make? I think we're running up on time. So just anything you like to make?

Look, thanks for the opportunity. Look, '22 looks good for us in the macro markets that we see. We do think we're enabling much of the infrastructure, much of the modern society that we all want with EV, AI, whatever it is, the company is certainly in a position to enable all those things. So that being said, we do think we've provided a nice investment to take advantage of all those markets. So thank you for the time.

Great. No, and I appreciate your time as well, and thanks, everybody, for listening, and I hope you all enjoy the rest of the conference.