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

Okay. Great. Thanks so much for joining us. I'm Noelle Dilts. I cover specialty engineering construction and services here at Stifel in addition to some other sectors. So we're joined next by Quanta Services, a $19 billion market cap company buy rated here at Stifel, one of our top picks for 2022, has been a topic for several years now. So we are joined today by Duke Austin, who is President, CEO and COO; and Jayshree Desai, who is the Chief Corporate Development Officer, but also the incoming CFO, I think, officially takes over that position in July. So thanks so much for joining us.

It will be a fireside chat format, but I will try to leave a lot of time for questions. And if anyone has questions as we're going through, just raise your hand, we'll try to get to that. So with that, I will hand it to Duke for just a really quick introduction to Quanta.

Yes. Thanks, Noelle. Thanks for having us, and thanks for joining us today. Quanta, as Noelle said, a $19 billion market cap. Our guidance this year is around $16.2 billion in top line revenue. So the company, in general, around craft-skilled laborers is the nucleus of the company and basically our end customers are utilities and everything that revolves around energy transition. So when you think about the company, you should think about facilitating the infrastructure necessary for the energy transition. And I believe we sit at the tip of the spear of that transition. So from that I'll hand it back to Noelle.

So Jayshree, you're the incoming CFO. Could you talk a little bit about your background, what you bring to the position and what your vision for the role?

Yes. Thank you, Jayshree Desai, joined Quanta 2.5 years ago to lead the M&A group at Quanta. My background is in the renewable energy space. So I think a lot of what we'll be talking about today and what you've heard about Quanta story around the energy transition, I think I can bring a lot of that history, experience, the customer relationships from the development side. I have had strong relationships with them, have grown up in that industry. So I think just that sort of perspective as we're moving in that direction as well, I think with my M&A background, that will continue to be a big part of my role that's very strategic for us and will continue to be so. But thanks to the hard work of Duke and Derrick, my predecessor, Quanta's got -- we're just in a really good position to be very strategic as we move through the next several years and into the next decade. The balance sheet is strong. I think I don't see any reason to change the way we think about how we manage our capital structure, how we think about M&A and our organic growth and in terms of how we deploy capital. I think the investment-grade rating will continue to be important to us. And so we'll watch that and try to keep our leverage ratios appropriate. But as Quanta has proven historically, we're not afraid to lean in when we need to, to make the right strategic decisions as we did with Blattner or as we've done when we have returned money to shareholders through share repurchases or increasing our dividends. I think all that has been very thoughtful, insightful. And for the time being, I see myself just continuing to think through that, but always with the lens of more of the strategic growth that we're about to enter into.

Great. So I wanted to sort of start with the Biden solar announcement around the executive order. Could you sort of speak to the importance of the order? You were already pretty confident in the '22 outlook for solar in spite of the tariff investigation. So how does this change how you're thinking about both kind of the near-term outlook for the solar market and into 2023?

Yes. So thanks, Noelle. I think in general, the way we would characterize it, we felt comfortable before. So we're incrementally more comfortable now, but I do think any time you get good policy clarity, I do think it's good policy if it hold. That policy gives certainty to the developers. And I think it's extremely important, gives you time to build supply chain now in the solar world, really, the panels, and it's extremely like important for the developer. And like for us, we were working through the supply chain working through how do we think through that already making strides. So I just think we have the ability to probably enhance the year but certainly give certainty over the next 24 months. And how about you, Jayshree, you come from a developer perspective.

Yes. I think just to add on to Duke, absolutely, it's positive. I think generally in the right direction. I think the administration realized that there -- the footfall that possibly would have resulted from the commerce investigation would have yielded something much more dramatic. And so they leaned in. The industry spoke very loud and clearly that this has an impact. And the administration stepped up. And I think the good news about this, as Duke said, I think this is a really good policy. It allows the developers to manage through the certainty and the uncertainty around this, right? They know how to price this in. They know how to manage the supply chain. They've got projects that are in the works, and this will now allow them to continue building that out. But more importantly, it lies the supply chain to think through the tariff implications, gives them time to adjust, move capacity to different parts of the world that won't be as impacted by if a tariff does come down on the Chinese wafer manufacturers, then this is a way and this gives them the time and the runway to adjust. And the solar industry has been through these times before, different types of tariffs, different types of policy shocks. And it's always adjusted. That's the good news. I mean it's figured out a way to manage through these things, and I think it will continue to do so and just kind of reiterate the commitment we have to the space.

Okay. So Duke, at Investor Day and on the first quarter call, your messaging around this solar tariff issue was kind of like we have a portfolio, maybe if solar is down a little, we're already starting to see wind pick up. And overall, we have a portfolio across the company. I'm just curious if in that time kind of between Investor Day and now, would you say that the disruption you were seeing to the solar industry was kind of in line with what you were expecting, worse, better? And just kind of how have things trended in terms of both the investigation and the supply chain in general.

I think when I looked at it, it affected both labor, union labor. It affected the industry where the country is trying to go from the sentiment towards carbon-free. It affected about everything you could think of in the policy. Look, anything you had to look backwards on after you have made the investment going forward, it usually doesn't hold. And I didn't feel like it would be an issue. We were covered off internally. We had thought through a multitude of different things when we gave guidance originally on Blattner. So I really wasn't concerned with the tariff itself. Other than the fact, I thought it was a bad policy for the industry. And it would cause some disruption along the way because everyone would start trying to solve it when it doesn't need to be solved, they were going to solve it anyway, and that's ultimately what happened is that got decent policy out of it where at least everyone can play in.

Okay. Okay. So just bigger picture with Blattner. Again, when you kind of acquired the company, brought it into guidance, you were expecting revenues to be flat to down year-over-year. So kind of price some of this in, but you are expecting longer term the Blattner to deliver double-digit growth. So could you kind of speak to those expectations? And to what extent does this just even disruption today and solar impact -- does it impact how you're thinking about the growth outlook for 2023? Or do you think the industry can kind of catch up and move into -- I guess do you think 2023 could be a growth year? Or does this disruption impact that?

No. I mean I expect '23 to be a growth year. I expect '24 to be a growth year, through '23 and beyond, the way the markets out there and the way that we see it. So we're roughly on 2030 renewable type, what I consider 100-megawatt above type solar project or wind projects today. Utility scale, so when you think through that, for us, we can maneuver fairly well through the cycle, any cycle, actually, on renewables. So our customers were -- we were collaborating with them, we were understanding their portfolios, whether it be wind or solar, working through the megawatts that needed to be deployed in '22 and beyond, not 1 project canceled, we had not 1 cancellation. So we had a some notice to proceed, delay, but the project itself didn't cancel. I do think you'll get more certainty. Those will go into contract. The time frame on it, I'm not confident, but I do know that what we said this year, and that guidance is holding. And I believe it will be -- anything that was really pent-up demand for this year will go into next year and beyond. So look, it was a tough market for the PPAs that were existing as well because you have inflationary pressures already. And if you can delay, you see the price of lumber going way down and you see the prices still coming off a bit, and I thought as a developer I would probably try to delay a bit to get it on the other end. So you're going some of that as well within the market.

Okay. So just shifting over to electric power infrastructure solutions. As you know, we are very bullish on this grid thesis and the electrification of the economy and sort of, overall, what you're seeing there. Obviously, electric vehicles are a big topic. So I kind of wanted to start there. Just one, how -- to me, it feels like the drivers are pretty much unchanged. I mean any change in how you're thinking about grid spending overall, and how much we're starting to see from electric vehicles?

I mean I think we have broad-based spending. What I will say is I'm not sure that everyone understands the impacts of EV and where the impacts are because I think while you might see excess load at night, that load can get down to the residential charging. And that's the fallacy around some of the dialogue that you hear. No matter how you look at it, no matter how you get generation, when you get past the distribution substation, the low side of the substation, your circuitry will not allow anything other than what it can handle. And so while you can change a couple of transformers out along the way, at some point, you've got too many change-outs and your whole circuit is bad. And then you're in the next circuit to next circuit. You're going to have to do things at the very distribution level, and I do believe that business is starting, but it will incrementally start to move forward in a significant way due to the fact that the current infrastructure in North America will not handle the load that's coming on the system from EV. And when I say load on the system, at the distribution level. You can do things from a transmission level and you can move generation, you still got to build transmission. And in my mind, that's the part that while you're hearing, oh, we got excess load, it won't get to where you needed to go. And that's the problem. It's like you've got a reservoir of water with the 42-inch piece of pipe trying to go into 4-inch pipe, don't work. You've got to figure it out and you've got to recircuit stuff. And so that's where I think the thesis around EV, as you see GM, you see others say, we're not building combustion engines. That's going to come quick, much quicker than people think. And we just did 360 partnership with GM on battery trucks in the west, about 4,000 in the west over the next 4, 5 years. And when I look at that, just the impact the loan of the Silverados coming into the fleet, it's significant. And that's just going to keep going and you're going to see more and more, and it's going to penetrate quite heavily.

Okay. And when you look at kind of what's been the small to medium project activity, what's been driving growth in T&D spend and growth in both CapEx and OpEx at utilities, any changes in what you're seeing in terms of the drivers do you know? Are we starting to see hardening, fire hardening pick up at all yet? Or is that still on the come? And I have had a few questions from investors asking if there was sort of a heavy early spend in utility distribution and transmission this year and if we could see a slowdown in the back half. So I'm not sure if you're hearing that, but any thoughts on that?

I think you just get started on many of the programs, the actual construction piece to the west is starting. We're starting to see some lines get buried and it goes from like 120 miles to 1,000 miles fairly rapidly, 10x. So when you think through that and the multitude that's out there, I don't think to the west, where you have fire risk to people, you can get around the fact that it's uninsurable in many areas in California. And the way that some of that gets solved is to underground, is probably the best way, especially when you look at economic and things of that nature, from an economic standpoint as well as insurability and life. And then when you move down, you start thinking about Florida as well as all through your Gulf Coast areas. I mean the investor base on the utility side does not want utilities that have issues with hurricanes and billions and billions of dollars of stranded costs and things of that nature on hurricanes. So that will eventually -- same thing, uninsurability, economics around the Gulf Coast, you'll start to see undergrounding across the Gulf Coast and Florida in 20 -- 10, 20-year type builds, big CapEx spends on the undergrounding there. So those are incremental to anything we've discussed. Many of those things are in early stages of kind of moving forward, but would kind of how we're thinking about when we talk about programmatic spend and getting in front of some of these larger dynamics, those are things we would be looking at.

Okay. Great. Just kind of finishing out the segment a little bit with a couple of questions. First on telecom. I know it's small today, but margins were kind of a factor early in the year. Could you speak to the margin improvement you're expecting and if it's on track?

Yes. I think the company itself is really working hard on the portfolio. But in saying that, I do think the telecom business, while we had a rough start early, some starts and stops, we're really doing well now and have -- currently have really nice projects ongoing. The ones that we're bidding are nice, the macro market's good. We're building out our solar -- I mean, our wireless capabilities, sorry. And I do think all those things put together will allow the market profile to expand as well as the top line expansion. The problem in 5G example would be what's the model on the backside of 5G? Well, you can put all the infrastructure all you want, but no one is making money in equipment and infrastructure. So I do think the models are becoming more clear, the density of small cells will become prevalent. And then on the backside of that, you continue to build fiber.

Okay. So it was just, I think, the 1-year anniversary of LUMA. So you put out a progress report. It looked like there was really substantial improvement in a lot of the areas that you're reporting on, in some cases, in excess of 90%. So could you talk about some of those improvements that you've achieved, where you are kind of right now? And then there was still this opportunity that we've talked about before to bid on $12 billion of projects, a lot of bigger projects there. And so how is that progressing? And where does that stand?

I think we're on track with Puerto Rico and the Island and what we're doing for the people there. I do believe it, in many ways, what we can do there is what you'll see across North America, the way that we modernize that grid. When we think about it, what we did is put out a progress report against really propaganda that was going on, on the island around what we weren't doing. So I thought it was really important to say this is what we did against what you've done in the last 10 years. And so here it is, here's the facts and that's after 1 year, which I think we've made significant strides. One of the things we've done is put like 180 plus. I'm not sure what it is today, a couple of weeks ago, 180-plus work orders-type jobs to be engineered. FEMA actually came out with a press release yesterday. It's a pretty significant press release, don't do it much, around the progress we've made and the monies they're putting into the Island. So that is starting well. And I do think in '23, you'll start to see some of the projects go to bid to build. And we'll bid on them and always like our chances, so we'll certainly be in the middle of that.

Okay. Great. So just shifting over to underground utility and infrastructure. First, I guess, I just wanted to talk about the LDC business. Again, you're seeing this multi-decade gas system modernization programs. And then I think we have seen some additional sort of regulations around safety. How are you thinking about the opportunity there and just kind of how the business is recovering and progressing coming out of COVID?

Yes. I mean we've grown that business nicely. I think we'll continue. When we talk about mid-single digits, probably growing past mid-single digits. We'll continue that way, really methane release on your distribution systems, pipe replacement, cast iron replacement. Those type of systems are like 20-, 30-year builds. So we can see them long term, point to them from a CapEx standpoint, it allows our investor base to see the long term what the company is investing your money in as well as ours along the way. So I really like it. I like it for a lot of reasons, but that said, I do think from an ESG standpoint, how we're looking at things, it makes tons of sense in those systems. If you're looking at valuations on LDC systems, they're not going to doing anything but going up. The reason they are going up is because it's hard to build now. And the ones that exist need to be really upgraded to be modernized to make sure they're efficient. And we're still putting in a lot of new residential for the most part, but that said, those older distribution systems are certainly being maintained and methane gas release is prevalent in all of our utility customers' minds.

Okay. So we are hearing from other companies that provide turnaround services that the spring turnaround season really improved year-over-year. The fall is looking pretty good. Can you speak to sort of what you're seeing on the downstream industrial services side?

Yes, I agree. I mean we said early on '08, '09, was down years in the business and tail of '12, '13 kind of moving forward, were really like up years all the way through kind of record, record, record for the companies. And so our business around [ cast ] replacement, high voltage and then the turnarounds around those 2 things, I mean, we've had a really nice start to the year. I suspect we'll finish real nice in that segment. We've invested a lot during COVID in people and the things that we're doing there, and the solutions we're providing to those clients. So it wouldn't surprise me if we didn't have a record year in that as well. So a lot of upside in that business. So we're pretty proud of where we sit.

Right. Okay. So just in the interest of time, I want to make sure I open it up for any questions. I still have more, but any questions from the audience? No. Okay. So kind of we've gone through all of the businesses. Could we talk about how you're really developing this portfolio approach, which you've mentioned a few times and sort of how you're leveraging your assets across the company to say, for example, using underground folks to support some of the undergrounding of electrical work? How should we think about what your -- how you're thinking about the business and looking at it from that portfolio standpoint?

Yes. I grew up in the business. Our family's business was that what we did telecom, electric gas, anything we could do actually because we didn't want to travel as much. So we just did quite a bit of service lines in south geographic area. That said, we got a lot of leverage out of it, a lot of operating leverage. And I thought it was important for the company, not only to put structure in, we have a 6-region structure now. We have a little bit of data, that COO is Redgie now because of the bandwidth and what we're trying to accomplish as a company in a portfolio. Jayshree is certainly stepping in a new role. And I thought it was really important for us to get that operating leverage to make sure we were executing at a high level through this pandemic and beyond because I saw -- we saw the growth in the company. That said, that operating leverage locally allows us to perform multitude of service lines across our regions and drive that margin on all sides. So as we pick up top line growth, we'll pick up the bottom as well along the way. And when you think through underground, a bore, wrecking bore, electric gas, telecom on any given day, we're also doing a lot of when you think about our gas business, they can also lay electric pipe just as easy. We will come back and pull cable in certain areas. So it makes a lot of sense, and it also provides the client base a different look at labor. So we're able to leverage labor along the whole system, and it becomes harder and harder to talk about in segments because our portfolio is performing much like you would a stock portfolio. Some are a little up, some a little down, as a whole, we're doing quite well.

Okay. Great. Just ...

What do you think, say, the direct impact?

Yes, it's a hard -- for me, that's really hard. If you look on a service line like there'll be competitors per service line, like a distribution, you'll have a competitor like gas, MasTecs out there, does some electric now. So I guess when you think through it, MasTec probably does about everything we do, other than maybe downstream, I don't know, I guess. But I really don't see it. Like I think when I think we're a solution provider, we're really trying to do something much different. And when you put Blattner in and all the scale you get out of that on the transition, we look and feel differently because we're providing solutions against big macro environment and not trying to do things very tactical. And I think a lot of people try to do things tactical. I mean we have $1 billion businesses, 30 operating units kind of the report through. Many of them are much bigger than the peers. So when you think through that, we're really trying to take all that and get at the high levels and look at the macro trends and make sure that we're capturing that all the way through the value chain, whether it be vertical supply chain, front-end services, engineering, those type of things, to make sure we're staying in front so we can keep the construction and actually the certainty of the client. And I think that's the real important part is our clients are depending on us to deliver their capital to take EVs coming, we're bringing in infrastructure on renewables, your loads are doubling over through 2040, all the stuff happened at once, attrition and utility workforce. And we're really working on craft skill labor and trying to provide those solutions. So I really -- I think about the company as a solution provider, much like a consulting firm that can actually do the work.

So when you think of the engineering for the -- as long as you're doing the engineering projects, who's the one that's actually consolidating through? Who's got the soft skills and [indiscernible] but actually do consolidate within the engineering portfolio?

I mean we self-perform about 85% of our business. So that self-performance of Quanta is unmatched. And whether it be engineering, we have about 2,000 engineers and professionals internally. We can turnkey. We can do pieces of it. So it gives us really the flexibility to do it all, take the whole program, if you want. It doesn't -- we don't -- certainly, that's what we like to do is provide that holistic solution. And in my mind, it's matched.

Yes. Just on your guidance, I wanted to make sure we touched on that. You raised your full year revenue guidance in conjunction with the first quarter report. And guiding to adjusted EBITDA of $1.6 billion to $1.7 billion. Can you just talk about some of the factors that are driving your confidence in that guidance and really what you view as the biggest risks and what you're most concerned about for the year?

Yes. I mean when you bought Blattner obviously is long term. Any time you buy, transact on a $3 billion acquisition, your first year, you want to make sure you get it right and make sure we've thought through it enough, coming from a large, public sophisticated private company to a public company is different. And so making sure forecasting all these things are right. So originally, it would be that. But the top side of that and the amount of inbound business wasn't enough in my mind to get real comfortable there, and I still believe that. And we did give long-term guidance. We already said we believe we'd be $3.6 billion by '26, '25, '26 in that time frame. So that gives us a lot of confidence long term. And then the rest of the business, when we think about it, we talk about all these mega trends. We talk about all the things that are going on. And we tell you we're going to grow the bottom EPS line, 10% on a CAGR basis year-over-year for the next 5 years. By the way, we've grown it faster than that. We believe all these megatrends will allow it to go 15-plus year-over-year for the next 10 years. But if it doesn't, it could move on these megatrends, but it derisks the 10. So you've got a floor at 10, all those megatrends coming in. So we think about guidance, we didn't expect our industrial business perform like it is. We're on 2 large pipe projects in Canada that are doing nicely and so that's some 2 things that we didn't expect. And it really derisk the model. That's what we're trying to accomplish. And look, I always like the opportunity to -- for the high end of what we're talking about, and I still think that's there. And certainly, it was very difficult for me to say, well, Solar is out of the business when we were on a multitude of projects with Solar. I mean I'm not saying it's out of business. We're sitting here doing it. I just think that's the thing for us is we are pretty certain on what we said. And we really need to just walk through the rest of the year, but there's plenty of upside around we only forecasted $200 million of storm. We've done $500 million plus the last 2 years. So is that out there? Can it be there? Sure, it can. So lots of ways we're there. But even at the kind of the guidance that we've given, we feel quite confident in it.

Okay. Sounds good. And Jayshree, maybe one last question just on cash flow. Typically, cash flow runs kind of countercyclical to revenue. You've got some nice growth opportunities out here. So how should we think about cash flow this year?

Yes. It's similar to that. We're guiding to $650 million to $850 million. We're on track for that. We do think a lot of that will come in, in the fourth quarter, which is typical for us. That's the cadence of it. Generally, our conversion rate is around 40%, 45% in moderate growth scenarios. But it can be -- it can move, right? A lot of our cash needs as we grow, we use it for working capital. So that will push on our cash flow. We got a big storm, as Duke said, we guided to $250 million this year. If more of that comes in, that will push on our cash flow. But -- and then Blattner, of course, is counter to that. Blattner work with their EPC. They do work upfront, where the cash comes in. So that will help push up our conversion ratios as well as our DSOs. But in general, we feel like we're still on track for where we guided.

Yes. I think that's important, like if we say 16 to use the midpoint, if we do 17, like the cash flow number's off.

Yes. Exactly.

Do you worry about the lines that are coming up that we do look at the capital structure with some of the larger debt coming due between 26...

No.

Yes, I think we have 10, 12, and 20.

We're pretty -- we feel pretty good about our capital structure, where we are. We have $2.5 billion of bonds. And I think we've got a path to manage that. We're at a 2 -- a little bit over 2x on the leverage ratios. We've got a path to delever to get us back into a 1.5 to 2x range. So no, we feel good about where we are in that.

I think we're actually looking at capital structure due to the long-term debt and where we sit at that structure and the interest that we have on the longer term debt, I mean it's 2%, 2.5% the right number. I mean that's -- we're going to think through that. But look, we want to run a conservative balance sheet.

It's pretty good at 9%, so I just figured...

Yes. Well, Stifel is. Okay, yes.

We're very cognizant of that. And I would just say, like we've always run it conservatively and we'll continue.

All right. Thanks so much for being here, really appreciate it.

Thank you.