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

All right, everyone. Well, thank you very much. We're super excited for this upcoming session here with Duke and Derrick from Quanta Services to talk about energy reliability, which is obviously very top of mind these days, and the growth opportunities in both renewables and grid hardening. Duke, before we jump into the Q&A, we'll turn the floor over to you to talk about what's top of mind for you.

Thanks, Neil. Yes, so the company itself, I think, in general, is still around craft skilled labor. It is really the core of where we're at. And I think as we see the energy transition and the trials and tribulations that are ongoing, you can kind of see what's going on in Europe and see some of the things that if we don't make the type of transitions that are necessary in a proper way, things can happen. And so I do think that Quanta sits at a really nice spot on tip of sphere type collaboration with our client to get us there. So the Blattner acquisition that we made, where we sit in the utility spectrum of capital spend as they try to modernize their systems to prepare for the future. And we were just in a good spot working on in a collaborative manner with many of the investor-owned utilities as well as developers across the world. So I'm extremely excited about where we are in a macro environment, all about our ability to continue to perpetuate the craft skilled labor aspect of the company.

Duke, why don't we start there? And let's talk about conversations you're having with customers, particularly utility CEOs. What is top of mind for them right now? And what are the solutions they're looking to Quanta to help them to solve?

I mean when we look at it and I think it's the backdrop of what we talked about a long time, if you take the electric side of the business, we're primarily around T&D infrastructure, whether it be large transmission, move in renewables, balance of plants, solar, wind, whatever. But those kind of things are certainly forefront. And when we made the acquisition with Blattner, it was around their ability to collaborate as well on balance of plant, solar and wind. So I think those 2 things are what the spend is within the utilities, as well as how do we think around EV and the distribution system. So everything that the utilities are trying to accomplish or the developers are trying to accomplish or even our industrial companies, and we can go to the LDC gas on gas replacement, when you think about methane release, it's this transition. And so where does the company sit from predictability, prudency, how do we think about it with the client? And more so than ever, it's more about the next 5 years or 10 on how we prepare for that and make sure that as they talk about their capital spends or what they're trying to accomplish, we're there as well, whether it be supply chain issue or undergrounding in the West. It doesn't matter, it's really a programmatic way that we can spend and allow a prudent, consistent pattern for the utility that they can get behind with the rate payer and their ultimate customers. So we need to deliver, deliver in a meaningful way across the board on craft and I go back -- we talked about this a lot, if you're a general contractor and you don't focus on craft, you really can't offer utility much. And so our ability to self-perform 85% of our work in a programmatic way, cradle to grave, whether we start with them early on the front side of the business in a program, or construct only, engineer only. We can do a lot of different things depending on where we're at, in North America, Australia. So that gives us a good overview of where each IOU is trying to take their companies and it allows us to give viewpoints on the cost. And look, we got inflationary pressure. And our job is to collaborate with the client to say, how do we alleviate that to the rate payer, and make sure in a prudent way, in a consistent way and we deliver. And we've been able to do that. And when looking at total cost environment, we just sit in a really nice position.

Thanks, Duke. Fahad?

Thanks, Duke. You touched on it a bit in your answer, but sticking with supply chain, materials availability problems have caused project slippage and timing issues across the specialty contractor space, but Quanta has been able to navigate them, I think it's fair to say, more effectively than many of your competitors even in the broader industrial space. So can you just help us understand how Quanta is able to mitigate these availability risks more effectively than competitors across the industry despite having a sizable share of fixed price contracts. And then is it Quanta's customer mix, the type of work that Quanta pursues? Can you just help us understand that?

Yes. Some of it has to do with, when we say fixed price contracts, the programmatic spends go in there as well. Our ability to reach across North America and help utility with poles, for example. I mean, wood structures were an issue. So does one utility have more wood structures than they need, can we borrow it, whatever, however we can do the transfer. There's lots of ways that we see our ability, on logistics, to collaborate. And then we did some unique things during the storms down the Gulf Coast with the way that we built infrastructure. So we can reengineer things, do things different than we've done in the past to make sure that we meet the demands of the capital spends while the supply chain corrects itself. It will correct itself. It is correcting itself somewhat. Pre-war it was going nicely. Whether this impacts more or less, I don't know. I don't think any of us do. But that being said, we're not seeing anything today other than some inflationary on fuel and things like that. But most of that is in a pass-through manner or we've certainly identified that as a risk and priced it properly. And so it's the way that we think about it with decline at the very highest level in plan. It's never been more important than it is today to work with the client on the planning aspect. And it's not tomorrow, it's really about a 10-year look at it and working on that as well. And I think you'll see Quanta be more involved in logistics in the front side. We keep saying the front side of the business, the engineering side, the programmatic way we look at things, permitting, things like that, that we can be involved in and should be involved in from a constructability standpoint, to really make the project go on time, on budget. So we're all involved in it across the board. We get a unique look that maybe others don't have and so it allows us to alleviate most of our constraints, not all.

And just a quick follow-up. I mean you used the term programmatic spending, especially with regards to a lot of the business activity that Quanta gets. Can you just help us understand how that programmatic spend differs, just in the context of fixed price versus nonfixed price, which an investor may just think of in general for the industrial space.

Yes. I mean, I think I'll just give you an example, 10 years ago, 5 years ago, 6 years ago, we're looking in Arkansas. We may have looked at 10 poles. Then it went to, well, can you help me with Little Rock. And I mean, this is fictitious, so don't hold me to it. And now it's, can you help me with the state of Arkansas for the next 5 years. And that can go anywhere from transmission systems, subsystems, substation rebuilds, all the way through the distribution system, to pole replacements. And it's really around the craft. The craft can move from one to the other in many ways, but our ability to say, okay, what does your spend look like? How do we move the craft properly to get you the construction necessary to get spend there on time and on budget. And when we say programmatic, it's really moved from a project with 10 poles and might last 30 days, to 5 years' worth of work in front of you that we plan for with them in a programmatic way. So hopefully, that helped a little bit. But it's like that times, a significant number with almost every one of our IOUs is how do we look forward in a program versus being the constructor only. It's very much, if you think about EPC and you flip it and you say, CEP and you lead with construction, it's that. So we can take away the nomenclature of EPC and go CEP, I'm happy with it. That's what we're trying to accomplish.

Right. Well, important to any CEP is obviously your labor and labor availability has been a concern for the industry. But again, Quanta has navigated this better than most. Can you talk about how you're thinking about managing labor costs, both in terms of the company's fixed and non-fixed price contracts? And what's your confidence level about the company's ability to continue to attract and retain labor talent in the near term and long term?

Yes. I mean I think we've done a nice job over the past 7 years or so with the colleges with how we look at veterans, how we attract labor in a diverse way, really looking at different labor sources, labor pools across wide spectrum, working with colleges, working with our union partners, trade associations, all those things. Early on, people were looking and saying, well, what are you doing in a college, what are you doing here, and why? And now like all those things that we've got in place is a really nice runway for us for a long period of time. And it's that investment that we made 7 years ago, we're well over $150 million investment and just around craft and how we train craft. And it's not just us. I mean, we're helping across a broad spectrum, our utility clients, many of which we have a major attrition going on, 100,000 plus over the next 5 years, while you have ramp going up substantially. And so those 2 things are colliding. And I think we're at the pendulum of that, trying to make sure that we make that transition as well. That's our, very core to me, 4 generations in the business, working with craft on how we ramp and can we do it differently? Can we look at it differently? And some of the skill sets on transmission are much different. Some of the skill sets on undergrounding are much different. We talk about our portfolio. Can we take gas drilling rigs and trenchers and things like that and move it to electric? Yes. Have we? Yes. Are we going to continue? Yes. So it allows really the company to look at craft in a portfolio. It allows people to advance. Certainly, you can move right through. Look, Redgie, our COO announcement recently, we've worked together a long time. Both of us came from the field. So anything can be done and really nice runways and kids can start off and making $80,000 a year roughly right out of high school, and we can make sure that we're facilitating that in a unique way. So look, I like what we said, a tight labor market is good for us. We planned for it. And I'm proud of where we sit.

Thanks, Duke. And just before we delve into the segments, I want to touch really quickly on the equipment side of the resource capacity equation. So our equipment costs and production lead times, could that be an issue at least in the near term in terms of Quanta scaling? Or is that something that you think you're well prepared for at least in the near term?

I think you've seen some of our capital ramp over the last 1.5 years and we work really close with the specialized equipment manufacturers. We're third, fourth largest fleet in North America, in a collaborative way as well. Some of them sit in our office. And we kind of predicted this and the company certainly had slots and was way in front of fleet. So we didn't sell. We let the cycle go a little longer. We also leaned into the CapEx on anything specialized. Not to say there's not issues here or there, but the company was prepared meaningfully for this. We were also ramping with Luma in Puerto Rico, so we had some excess fleet as well there. And it really allowed us to think differently and we continue. It's not gone away. It'll be tires for one day and you go, well, tires, tires are a problem. And just one kind of tire and wow, so you start making phone calls. And we have a really good supplier. We just did a partnership with GM with Mary and on battery vehicles in the West to take a significant amount of Silverados off the assembly line. So I think that kind of partnership is necessary not only for the environment and who we are and what we're trying to accomplish, but it makes business sense as well for us in the West. So we'll continue to partner with the major suppliers. But in general, I think the company itself works hard at making sure we deliver to the customer. You've seen us -- we have a helicopter fleet of 60 plus. We did that because we didn't want issues on our work. And we can't rely on someone else, and that self-performance, both on Blattner and Quanta, 85% plus, is really meaningful when we move forward here. And it doesn't -- we don't get caught into these cycles as much.

That's very helpful. So now we can move to the segments and starting with electric power. Quanta resegmented some of the transmission and distribution activity into the new renewable energy segment. How do the financials and risks differ between the transmission and distribution projects in both the segments? So is there a difference in margin performance and consistency due to the procurement exposure on the generation side? And are project sizes materially different between the two types of activity?

Look, so we did resegment and we felt like we had a nice renewal business pre-Blattner. When you put Blattner in for our investment community, it made a lot of sense for us to really spell it out. What I would say, it's a lot of interconnections, primarily interconnections moving generation, power lines, substations, those kind of things that are in there. What I would tell you, and Derrick can comment on the numbers, but what I would tell you, it's lumpier because of the way the projects sit in there. So you might -- your backlog in it and the things within it are much, I would say, somewhat more lumpy than our base business and the way that we look at the electric side. So the large project we announced to the West would be something that would be in there. So you're putting in large projects as well because they're moving renewables east to west or wherever we may be. And so all those things are in that segment. That being said, it's a big macro market and we're bullish on the market. We've already given $3.6 billion guidance on Blattner to 2025, that whole segment is like that. So we do think there's significant growth, and I'll let Derrick comment on the margins.

Yes. Well, first, maybe a bit of clarification. The distribution work really remains within the electric power segment itself. And these components that would come over and the renewal is going to be more like Duke said, your interconnections, your transmission, your substation type dynamics and the new generation. Distribution really is going to be on the electric power side. From a margin perspective, you're asking kind of the procurement side. What I'd tell you is we have the ability to do EPC work on traditional electric power, and we have the ability to do EPC work on the interconnection. So where that EPC work moving back and forth can move on the transmission side of the equation, the transmission, whether it be interconnection or traditional, same margin-type profile is available to both sides. So I think you can see kind of a double-digit type margin profile irrespective of the type of work you're doing there, substations the same way. Substation, we're agnostic as to whether it is supporting renewables or not relative to building that. And so good margin-type opportunity spread equally amongst either. Procurement overall, there are times where procurement should be a bit dilutive to margins. We're fine with that, right? We're focused on expanding our return on invested capital. And so procurement has a nice in-built return with less overall capital intensity. But in general, I would say that we've been able to execute through contingencies in the remaining portion of the work, oftentimes, since it brings the margin profile to the type of work both in renewable generation or transmission back into what we see in that kind of 9% and 10% profiles that you're seeing there. Electric power side, we're guiding to a little bit higher overall margin. There is a bit. So you're looking at the 9% margins renewables. Some of that is going to be a little bit procurement. Renewables is probably going to run maybe a little bit more 20% to 25% materials, whereas electric power is going to run a little more 10% type into materials. But good margin profile associated with these segments. Duke did make comment to the variability right, in the renewable segment, simply because there's a more of a project nature or more of an ebb and flow of the way those projects work. And then as contingencies blend themselves out, you can see just a little bit more variability, but feel very comfortable on our ability to execute in the long term and a double-digit EBITDA profile today.

Thanks, Derrick. And the follow-up is just around market share. Your revenue growth expectations continue to exceed forecast for utility spending growth in transmission and distribution. So I guess that implies increasing market share. Can you talk about how investors should think about Quanta's addressable market in the space? And should ultimate -- and how confident do you feel about your ability to continue to take market share in electric power?

Yes. I mean, I would say, in general, I'll just go back to our commentary we've made over and over, is we believe we can grow the base in the electric business kind of mid- to upper single digits over time. And on the renewable segment, it's double digits, the way I see it. I mean, we've given $3.6 billion guidance in 2025 to anchor that segment. But Derrick can comment and clean it up. I think so.

Yes. No, I mean, I think it's exactly that you're going to have some project variability, right? We've always talked about that and any of those things that can make it to where at some point in time you can have a 10% year follow-up with maybe a mid-single year. So that mid-single double-digit opportunity continues to be a component of any of the equations, mainly on the underground and electric power segments. Renewables continue to grow, we think, very much at a double-digit CAGRs in the period. CAGRs is usually the way we are referencing, because at any point, you're going to see some movement, storm work, large projects, or whatever, you should speak to in a CAGR-type dynamic. But due to the broader aspect of the addressable market, I think that we would say that we continue to feel like that market itself, the stacking effect of the tailwinds continues to be growing in any of the areas. So when we look at mid-single to double-digit type opportunities, that's already through a 5-year horizon. When you start thinking about the stacking effects, those are elongating our visibility, and if you think that any of those things accelerate, then it gives us to get even more of that stacking ability and the growth dynamic, more near term.

Thanks, Derrick. Fahad?

Now going over to margins in electric power, specifically. I mean, the operating margins have -- you guided to basically another year of above the historical average of that 10%, excluding the LUMA JV and the electric power segment. So what factors help drive that margin outperformance in any given year and also allow Quanta to kind of perform above peer averages? Are there structural developments in the business that could support sustained margins above that historical level?

So we talked a lot about double digits over time. You add LUMA in, you're kind of 10.5% over time at the operating level. Some will talk about EBITDA. We're saying operating income at that level. So when I think about it, it's really about utilization. We're doing a nice job. We've talked about operating leverage with the portfolio. If you take out electric, you take out telecom, you take out natural gas and say you're going to run it from a portfolio basis, which is ultimately what we're trying to accomplish, which should impact the overall margin of the company much easier than to talk about trying to increase the electric margins more. In my mind, we're doing a real nice job of training, getting people to fill quicker. There's a lot of things that we're doing there. On the front side of the business, the returns will be better from an ROIC standpoint due to factors of capital and engineering per se or things of that nature. So we are picking up better returns just because of the way the capital structure would look. I don't anticipate us being able to expand those margins past where they're at in my mind over time. I do think it will level out. We're doing a nice job. We'll continue to work at it. But some of the larger projects on the renewable segment there, we certainly have room if we operate through larger-type dynamics. So on that side, but if you just look at straight electric power, I do think where we sit, we're in, like you said, industry-leading margins. We've operated higher than that. You get some utilization impacts, the programmatic spends, the underground effect. Some of those things can drive it up. And like Derrick said, we will stack on top of what we've already done, whether it be EV charging, whether it be undergrounding to the West, Gulf Coast, it doesn't matter. I do think you'll start to see some of that stack and we'll increase some of those margins, but really, the overall margin of the company should move up.

One bit of clarification. We have clearly, to your point, this year we guided to an aggregate 11% ex the equity and earnings component of it, that is a 10.5% electric power, kind of at the midpoint. We've had some really good execution over the last few years. And as we continue to look out, the programmatic spend dynamic that Duke has spoken about and the dynamics I think are continuing to execute through. We've seen, and I feel comfortable with kind of that 10.5% electric power, which is a bit up, as well as we think that telecom, which had been a bit dilutive, we think we're overcoming that. So a combination of those things. And then honestly, I think, go back to Duke and Redgie as an example, being from the field of focus on craft skilled labor, how that translates into the ability to focus extensively on the level of productivity that is in the field. That's very important relative to execution, executing to those contingencies. And I think that, that mindset continues to play well for us.

That was super helpful. And so now let's move specifically to the renewable energy segment. Blattner had performed the vast majority of its work with repeat customers at least prior to the acquisition. But now, of course, being housing in Quanta, there may be an access to a broader customer base. Can you talk about Quanta's strategy for expanding the project activity for Blattner maybe beyond that repeat customer base, if that's in mind, and the cross-selling opportunities between transmission and renewable generation? Would incremental hiring be required within this segment, and then would Quanta take on projects that differ in size or nature to the work that Blattner is currently doing?

I mean, it's early for us in this transition with Blattner. But what I would say, when we think about it, it's certainly not 1 plus 1 equals 2. I think what we see is much, much broader. Both companies have looked at the markets that we serve. And we think through their clients, our clients, our utility customers, each one of them is moving to somewhat of a carbon-free environment and we are helping them do so. Where the conversation in the past was, no, we were not interested in balance of plant, anything. Now we say, well, where is your plant, how many megawatts of renewables that you want to build, and let us help you build them over the next 5, 10, 15 years, whatever it may fit. And by the way, we can help with your right-of-ways, we can help with your constructability, we can help with your total cost in a meaningful way. I think if you go back and you look at the megawatts of renewables that have been built, Blattner will be somewhere near 1/4 of the build. And I think if you go back and look at large transmission in the States, we're over 50% easy of large transmission. And it's roughly past that over the past 50 years. So both companies have a great degree of depth in construction. Now I think it's taking that constructability to 85% that we do internally and saying, how do we get in front of this transition with the client, whether it be hydrogen, EV, all things energy transition. So the company itself is providing all things, all solutions for energy transition. That's a much broader macro market than utilities. And we can talk to a tech company one day, Bitcoin the next, data center the next, and 14 utilities. So where we sit in the pendulum of the macro market in this transition is at the very tip of the spear, and we have to capitalize on that at a collaborative manner like we've done with transmission and balance of plant, solar, wind. And I think both companies are prepared to do so.

Duke, I never thought I would hear you say the word Bitcoin. So customer base is expanding.

A lot of power. We're all in.

Across the risk spectrum, utilities and Bitcoin.

That's the pendulum.

So let's talk about EBITDA margins at the segment. What gives you confidence that Quanta can maintain that double-digit EBITDA margins that Blattner achieved historically, especially as project activity begins to expand beyond Blattner's repeat customer base?

Look, I think they do a nice job of lean construction. And Quanta itself, people say, well, how do you do that? How do you increase? We're not increasing pricing every day to our clients. We're getting more productive. And that being said, it's knowledge, and we have a lot of internal knowledge that's built up through craft. And both companies think through how we build on a total cost basis. A structure might not be in the right place from an engineering standpoint, it might cost twice as much. We're able to do that evaluation for our clients and say, hey, put this structure over here and it might be 20 yards over and it makes huge impacts to the cost. And so we're really able to drive cost out of the system. And I think that needs to be kind of the way people think, is how do we drive cost out of our systems versus looking at, oh, the labor is going up, inflation is going up. Well, what's the cost? And how much is that driving the overall cost. So we really work at that aspect internally and look at ourselves as well. And technology is moving forward and we're doing some unique things with technology to make sure that we're cutting edge. And there's just lots of things we can learn and we're just getting started. So I'm really excited about it.

Okay. Thanks, Duke. Let's wrap up on capital allocation. Blattner was obviously a successful acquisition in the eyes of the market. But how do you think about electric transmission and distribution M&A and even renewable generation M&A? Do you see yourself as a logical acquirer? Or do you have enough organic opportunity set to say, grace over and want to focus internally here in 2022?

I think internally, we made significant amount of acquisitions there in the fourth quarter and we're digesting and making sure that we get the right synergies in. Not to say you won't see a bolt-on acquisition here or there. We weren't looking for Blattner when Blattner came on the market. And if we see the right opportunity, we're more than happy to lean in as a form of capital allocation. I do think the company will generate a significant amount of cash. And the only way we're going to degrade where we sit is, sit on cash. And so we're either going to look at it, buy our stock back, we're paying dividends. It's the same forms that we've used in the past, I think you'll see us deploy in the future. But there's no shortage of acquisition candidates or things that we can do within the spectrum and the macro markets that we're in. We've been prudent about it. We've taken a disciplined approach to make sure that we fit the strategy. I believe we have a strategy session there in New York here coming up that we're pretty excited about, laying our strategy of the future, which M&A would be a piece of that. And then Derrick, you can comment.

I don't have anything to add other than we tend to run a little bit conservative in the balance sheet, so we can be opportunistic in deployment of that capital, leaning into large projects, leaning into the M&A opportunities, leaning into share repurchases. We don't like to have to choose at any given point in time. We'll prefer to run a little bit conservative in that balance sheet because we think that there are lots of opportunities for value creation.

Well, I know we're at time. There's so much more we could talk about. Obviously, a very dynamic business and you have an important opportunity set here in 2022. We wish you lots of luck. Duke and Derrick, thank you so much for spending some time with Goldman Sachs and our clients today.

Appreciate your time.

Appreciate it.