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

So good afternoon everyone. I'm very pleased to have with us Quanta Services. We have Duke Austin, who is the President and Chief Executive Officer; as well as Jayshree Desai, who is the Chief Financial Officer. In terms of today's format, it's going to be more of the same. I'll kick it off with Q&A, but if anyone does have a question, please raise your hand and we'll get the mic to you, so because we're webcast. So but anyway, so thank you guys so much for being here today.

So I guess I'll start off. Lots of concerns out there on the macro despite a lot of industrial companies that are here today, fairly bullish on some of the growth opportunities ahead. But Jayshree or Duke, assuming we do go into a recession or we are in a recession, can you talk about how you think Quanta's earnings or portfolio would fare in a recession and how are we sort of different this time relative to other recessions?

Yes, when we look through the business, thanks for having us, Jamie. So for us I think we're looking at recessionary pressures, things like that all the time and in the past in history the utility businesses performed well through any kind of recessionary periods. It doesn't mean there's no pressure from newbuilds things like that that we watch, but the way we think about the portfolio and what we've created with the portfolio. Given the macro trends and demand of electric vehicle penetration, renewable threshold, goals, all those things are in play on our macro drivers, plus it is utility business that has a high demand of capital ongoing. We don't see -- we don't feel the pressure and I believe as long as we operate in a prudent manner, we will continue, like we said in Investor Day, to grow the adjusted EPS at double digits over a CAGR basis with the opportunities to go 15 plus. And I still see that through this time period.

Yes, and I think I'd just add from a -- from a cash flow perspective right and typically, when we are faced with a little bit of pullback, the cash flow comes flying in and it helps sort of hedge and derisk the business as a result. So we're feeling from a balance sheet perspective and a capital allocation perspective that even if certain pressures happen, we're in a good position to be able to manage through it.

And we're not seeing our customer base pullback. I mean we're actually seeing our customer base grow their capital budgets.

Okay. So -- and I want to talk about electric power, but why don't we talk about renewables because it was so in the press in 2022. So first, talk about the strategic importance of the Blattner acquisition, and what would have been sort of the positive and negative surprises within Blattner and then we'll talk about the end-markets after that, like renewable, solar and...

I think as a company the demand from the client for us to build Blattner plant wind, solar was there. We heard it every day when we went into a customer at the utility side of the business since we felt like the business has transitioned in that manner. And with the acquisition and it allowed us really to provide a turnkey solution to the client and become more of an energy solutions provider at the tip of the spear of the transition, which I believe we've done that with the Blattner acquisition, they layer on top of this very nicely, culturally. When we look at it today, we're impressed with the management teams, the way we think we can grow the business in a holistic manner with both sides of the client with the renewables side, the developer side, we're able to do electrification there with interconnects, all kinds of things there, it provide synergies. And then on the other side of the business with utility customers going into some renewables, things of that nature allows us to build balance of plant renewables for our utility clients. And together broad supply chain that allow --- they're buying lots of cable, lots of wire and things like that allows us to think differently from an EPC basis and how we deliver back to the client these solutions. To transition and even if you go over to the UI side, our clients there are also developing solar, wind, other kind of renewable energy. So it just allows us to provide a turnkey solution.

Okay. And as you looked at 2023 within renewables, are we more bullish on solar, are we more bullish on wind. Are we agnostic? And can you talk to -- in 2023, is there an opportunity for us to see, you know, revenue synergies between Quanta and Blattner as we're further ahead?

I think you'll see revenue synergies in '23. That's going to happen. So that said, I also think we -- when we look at wind, solar, it doesn't matter, portfolios are moving around, but solar is going be prevalent next 2 years. Jayshree can correct me, but that's how I see it as it stands today, be more prevalent. And so I think we'll see more of that, but the wind business is fantastic long-term and we're really looking at it long-term and supply chains are moving in. So I do think all the data that we've given on $3.6 billion in '26, I think that's moved in, in our mind but why don't Jayshree comment.

No. I mean the only thing I'd say -- add to that is Blattner grew up in the wind business, they are very strong in wind, they're very strong in solar. At the end of the day for us, we're sort of indifferent when it moves forward. But from a market perspective, the IRA, while it's given really good long-term visibility for both solar and wind it was very beneficial to the wind industry as those credits had started to look like they were going to expire, it's now picked back up. But the incentives around solar in the near-term are actually stronger in some ways for the developers. So you're going to see the developers as they optimize their portfolio because they too are indifferent about whether they're building solar, wind, but they do care as to what's going to drive the highest return on their investment. And so they're going to push forward more solar initially and then allow wind to catch up as their portfolios around wind projects on the interconnection of the permits allow them to do more of that in the latter half of the decade.

Okay. And then I guess, Duke, you should be flattered by this, but you do have some of your some of your peers who have done some M&A in the portfolio looks more like you relative to what it used to look like just as you think about people trying to capitalize on some of the secular growth markets that you had in renewables and electric power. How do you see that impacting the competitive landscape, if any? And besides, [indiscernible] do you see smaller roll-ups happening? You know what I mean is people -- is that a concern for you like how long could you sustain your competitive advantage assuming we have more people attracted to your market?

I think people have been attracted to the market long time. And when we look at M&A, the competitors were there before. It's actually less competitors because it's more and more consolidated. That said, when we think about it, we're really focused on where we're going and where we think we can go. We're past that from a company -- we're on to what's going to happen in the next 5 years, not about what's going to happen in this. So we've got 5 years, so the next 5. I think in my mind when I -- when we walk through it having people kind of trying to follow us has always been that way, it's nothing new for us, we've always had competition. I do think we've separated. What we have is we self-perform 85% of work. We provide a great solution, really collaborate with the client and we bought world-class companies that have longevities over time and it just separates at the client level and it gets -- we get good strategies around what we're doing. The stocks, look it's -- I think everyone would say it's pretty tough to think there is a lot of debt running around. It's going to create some noise in the market, but we've never been one to lean into a fixture helper and I don't think that's going to change. So there'll be opportunities that we'll always look at and try to capitalize. Make sure that's in our balance sheet, we're utilizing it properly, but I see more strategy type acquisition things that we can do that create long-term type growth as well as separation between us and someone else.

Okay. And does anyone in the audience have a question, if you do, please raise your hand. All right. It doesn't look like it. So just because you sort of touched a little on M&A, you just did the Blattner acquisition, China understands where your M&A priorities would be going forward, lots of excitement in communications, you're a smaller player in communications that fits within your electric power business. So do you feel like you need to do an acquisition there? And then the other side of it is, I feel like from covering you for a long-time, you grew up as more of a -- viewed as a construction player and then there were a lot of efforts internally to grow the engineering side of the business. Is there more to be done on that front?

Yes, I think when you go back and you walk it back you say, well you're -- FPO, for example, we were a contractor for FPO 10 years ago. Today, I believe we're energy solution provider to NextEra, which is one of the largest energy companies in the world. So I think both of us have grown up together. So we look for ways that we can go with the client where they are going. And yes, front-end services is a priority for us. We really want to work on those capabilities either organically or we would look at M&A. Technology comes into play, really it's -- we self-perform 85%. We want to be more nimble to the client, and deliver services quicker, faster and more economic and create value of that solution. I continue to believe we will evolve the company towards, you won't think of us as a contract, you will think of us as, hey, we're trying to get to an energy transition, help us get there, which I think is what we're doing today in a programmatic way, which is much different than we've had in the past.

Okay. Any questions in the audience? All right [indiscernible]. I will see who understands through this one, but as we're thinking about just trying to level set for 2023, I think what struck me is the earnings trajectory in the back half of the year relative to the first half of the year and I think your earnings there ending the year at $1.70 a quarter or so we multiply that by 4, it's -- we're approaching $7 in earnings power in 2023, so is that a good way to think about the base of earnings in 2023? And then is there any way everyone's earnings had a lot of inefficiencies in 2022 because of labor, solar, whatever -- you can name what -- is there any way you can sort of quantify inefficiencies that potentially go away next year?

Yes, I mean I do think supply chains get better, I'll go backwards. I think supply chains get better throughout the year. They are already starting to see some of that now, Jayshree can comment more on some of the supply chain things on solar, but in general, that's starting to move away from us. So I don't see that being a big issue at this point. I'm not going to give guidance, but that said what I will again -- your math -- you're not wrong in the way you're thinking about what we're looking at. Can I give it -- do I know exactly where that sits in the pendulum of the guidance? No. All that -- and all the math it's done, the way that you're thinking through I see no reason that wouldn't be somewhere in there, I mean, in the range. And so what's the range, how quickly do some of the solar projects come in. All those kind of things we got 3 months, I will be doing a disservice today to try to say, hey, it's this. I just think, yes, we're in a robust good environment that we believe we can earn up here like we said we have in the past. So without giving guidance, I do believe we feel real confident in what we see and see no reason that we can't stand by kind of all the dialog that we've been given. That said, the stocking of those projects we talk about this a lot 85% of the business is [indiscernible] we can predict it, is that stock of, okay, how many solar projects, where are they are at? Where they are at in a pendulum or when does this start? Where does Canada go, so we need 3 months that we have here to really refine it, but on a holistic measure, you're not wrong and there is seasonality in the business. So you can take like one quarter and extrapolate, but I'll go with you on it and say, okay.

Yes, that's what I wanted to jump in and say. I will remind you the seasonality of our business, so I don't think you should take 1.7 times 4 given the fact that our first quarter tends to be lower and we ramp-up towards the third and fourth, but to Duke's point, the general trends are really good. And as we said in Investor Day, we believe in our double-digit EPS growth, [indiscernible] that.

Yes. And we're going to be prudent to how we got. We always are -- so we are going to make sure -- we want to hit our numbers.

Okay. Lots of excitement about spend on the West Coast as we're putting transmission underlying, can you talk about when we should start to see those dollars flow and just your positioning on the West Coast?

I like our position there. They are undergoing quite a bit -- there is some program management in there that's kind of -- we're looking at. The amount of undergrounding.

The dollars are staggering.

They're staggering and they're going grow. In the West, the issue is, it makes sense now to underground because of all the uninsurability, all the things that are happening in the West on strike, human life with fire that it makes tons of sense to underground a lots of areas and I think it will only grow -- that program only grow. It's starting now and the West, it just takes a long time to get things moving. But all the clients, at least 2 of them are going through underground processes now, quite heavily we work in the West quite a bit and I like how we look there. I think we'll be able to deliver economically as well as give clients a solution they're asking for. And it's -- every year it ramped, I think it doubles next year, plus-plus. So there's opportunity, opportunity, opportunity, we just need to deliver.

And our customers looking to -- as they think about the spend getting let go and how they're going to approach the contractors, more I want to choose Quanta as the provider of choice. And this is how I'm spending this in CapEx. Over the next couple of years, I want to rely on one person or is it going to be more one-off, you know what I mean, like awards?

Both. I think you'll see both of those models. The models will always fluctuate sometimes to us and when utility want to give a choice. And when I say okay, well, you're not. And 5 months later, you are, I just think our ability to self-perform and our ability are construction-led, the way that we think about craft and what's necessary to actually put things in the ground separate us and eventually whether it be day-one or day 100, we tend to really capture the client and they understand we know what's something cost when delivered on-time and on their budgets and it's going to be necessary in California.

Okay. And then broadly as I think about your portfolio has strong secular tailwinds in front of them. The one area that I probably disagree is probably stronghold, you know what I mean when I think about it sort of more in industrial-facing business, so I mean, would you agree or disagree with me, do you think you could add to that business or diversify it, so it would be less cyclical over time? I'm just wondering, how you think about that business given everything else is secular and this is cyclical, the margins are cyclical or does it become too small as a percent of the total portfolio that Jamie you're focusing on something that doesn't matter?

No, look, we look at all of our sectors there. We also have a nice high voltage business that's in industrial base as well. So that catalyst replacement turnaround business. I still -- No, look, we look at all of our sectors. We also have a nice high voltage business that's in industrial base as well. So that catalyst replacement turnaround business. I still -- record year this year, I still see opportunities next year for that, it's fairly resilient. We don't invest a lot of capital there. So I like -- we're not -- we haven't made acquisitions of very small bolt-ons here and there, but what we've done with a great management team, we continue to grow it out. Obviously, the other parts of the business are growing faster, but when you think, well now we're going to import Venezuelan oil into refineries here in the U.S. that we're going to change heavy oil from Venezuela on the catalyst that changed in a day. So, like we're going to stay involved in the energy business across the broad spectrum. Obviously, our renewable business, our utility business is much greater. But we do look to optimize our portfolio all the time.

Okay. Any questions in the audience? No.

And I will go back to the big pipe and just say like, when you saw the big pipe kind of move up and could invest in 6, 7 years ago. And so we just go and invest in it but I do think we found opportunities this year going to projects in Canada that's provided great earning streams for us. So we haven't put investment in it. It's not degrading earnings there, but it's allowed us to participate as much as we want in large-diameter pipe if it comes back, it's just not a focus.

Yes. I mean, but that's an interesting question, because like on big pipe, we didn't really participate in the last cycle. I think that was a conscious decision, but there's a lot of it -- you know and I get it because your stock move with the price of oil, and it was highly cyclical, but like how you think about how you want to be positioned competitively as people talk about hydrogen or carbon capture. If you want to participate in that market, is there investment that's required from your perspective, because we sort of walked away from the gas pipeline business?

Yes. I think you know if you just you could look at TransCanada and say, well it's TC Energy, they have significant amount of power, significant amount of solar, wind, they're trying to build the portfolio the same with Enbridge. So big clients, big pipe clients they're going through energy trends, we talk to them every day about really become an energy solution provider and not worrying about big pipe or something else, we want to do it all with them and I think that becomes the solution to own versus oh, well you are just a big pipe person. No, we're helping you become -- helping ourselves and you transition into an energy company. They're all doing that, and I like where we sit, we will build the big pipe. I mean we're right around the edges on all of it. So we'll guide to $500 million a year, we can stack on top of that and we have a great team. We're just not going to focus on and invest in fleet and all that kind of stuff. We're going to use our capital in other areas.

Okay. And then, LUMA. So can you just provide an update on LUMA? The performance there relative to expectations, sort of the positives, the negatives of the LUMA work, and then should we see like in 2023, do you see additional opportunities to win work in Puerto Rico outside of LUMA? Yes, go ahead.

And so LUMA. Look, we're doing great things for the people of that island. There was a Cat I and Cat II hurricane kind of high Cat I hurricane, it cost $4 billion plus damage that we picked up, and 80% of it was up in less than 10 days and the rest of it was up in 15. I think it's remarkable 1.4 million customers are what we did as a company as LUMA. And it doesn't get noticed, it doesn't -- you don't hear a lot about it, but the island wasn't out 350 days-plus. And we've done great things there. Yesterday, they signed a supplemental agreement, the Governor did, that allows us to take from where we're at in a supplemental agreement to bank once they get out of bankruptcy then it goes to 15 years, but there is no timeframe on it. So it goes all the way to bankruptcy is done. And so it really alleviates the pressure of a one-year, 2-year, 3-year agreement. What we did learn within the storm is, we were able to help the island on how FEMA -- to get FEMA funds and understand what was the hold-up, the roadblocks and work with government that I believe will ultimately help the islands of that will progress quicker based upon our conversations now and ability for people to bid and have workforce there on the island for the ultimately to $12 billion to $14 billion worth of capital over the next 10 years or so.

Okay. And do you see, you know, additional opportunities like LUMA to provide sort of add to the longer-term earnings visibility or secure earnings visibility given a contract like that? Are you looking at anything else or talking to anyone else?

LUMA is unique, but I do think there's opportunities that are similar in different ways, but like we're always looking at things like that as a company to separate. I mean when we talk about how you separate. We separate it by looking at those kind of opportunities just and I do think there are out there.

Okay. And then margins for -- I want to focus on margins for Quanta, electric power always tends to over and do well. Renewables is largely on track and have been beaten up an underground utility for as long as I can remember. And we're like getting to like where margin targets are, so when I think about margins for Quanta going forward, is the margin improvement story largely over? And as I think about your earnings, it's more in the margins are range-bound and the opportunity to grow our earnings is more reliant on the top line?

No. I think when we look at it while you're looking at it -- segments and we are getting a lot of them up, there's pieces of the segments. There's things that within there that we can come up in margin profile. So as a company, we're really working on focusing on in the field getting operating leverage in the field in a regional structure and the structure that we have that allows us to perform gas, electric, telecom, solar at one location and it really drives the profitability of the overall company while you're looking at it in segments both should drive the whole -- every segment should come up of some based upon that even if you shrinking G&A against the build. So just in general, I think utilizations are going up because of the way that we're operating the company. So that will bring it all up from milestone doesn't necessarily have to be tough on growth. The other opportunities are the returns on things like we're doing more material purchasing. We're doing more things of that nature for the client sourcing things that don't require capital, the margins may be a little less, but the risk is minimal. And it's just us providing solutions and I think that the returns if you go back into the 2015, 2016 kind of timeframe our returns was like 5 something percent. I mean we're double-digit type seasonality now and I think those returns will continue. I know margin is a big piece of that, but also the way we look at cash, the way we look at capital expenditures as well. So our return should start to move up as well.

Okay. And then just if you could go a little deeper on IRA and IIJA and how these stimulus package position Quanta longer-term and I guess I'm surprised, because at the conference I'm starting here companies say they are starting to see signs of funding happening already with both of these relative to other stimulus packages in the U.S., always prove very disappointing. I mean, you know, so I'm just wondering are you seeing it where Quanta will see it first in sort of why do you think this is different than other stimulus packages that we've had in the United States before?

Yes, I can talk about the IRA in general, then I don't know, Duke if you want to add something about the Quanta perspective, but the IRA is maybe not transformative, but it really allow the industry to be able to plan for the long term. It's something that alluded the real industry for decades and even without that sort of long-term certainty the renewable industry was growing because the demand was so strong. The IRA now does is allows financiers, manufacturers, suppliers to have long-term certainty, so they can invest with that perspective in mind. And I do think that that is what you're starting to see that you're hearing about manufacturers finally saying it's worth investing in this country, the high rate supports that type of investment opportunities. You're seeing developer say okay, this is now my portfolio of wind and solar projects, some of these projects that may not have been as economical in the past, are now able to be able to get higher returns than I thought before. Timing, of course, as I was talking about earlier is always the issue with renewables, but over the long-term period that ability to maximize that portfolio has only increased and I believe that's why you're seeing such an added interest from other stimulus packages than in the past. The other thing also, it's not that much different from how the industry is operated for a long-time in the sense that the type of incentive is what the industry is used to. Put out some tax credits, ITC. So the industry understands how to put that to work and investors as well and how to put that to work. What is new is some of the things that came in around hydrogen. Some of the things that have come in on domestic manufacturing, that will take a little bit of time to work through the system and get projects up and running, but for the pure wind and solar, it's full steam ahead. So long as you can get through some of the supply-chain issues that we were talking about in the third quarter call, and you also have to give developers time to absorb what's happening from the guidance perspective that comes out from treasury you got to analyze it and then start working through it. So I think it's very different. And in terms of the last year's IIJA, [indiscernible] all these acronyms, yes, I think that is also a positive trend. I do believe utilities are already moving towards the capital spend around renewables and transmission distribution, we're just continuing to grow. So in some ways that was more just icing on the cake than something transformative. But again, if people are serious about the energy transition, there is a real strong recognition from utilities as well, but they've got to invest and ensure that this happens.

Also, when you think Quanta, the labor delay that we have our [indiscernible] programs, and all the things that we've done, we looked at things early on the IRA and made sure that all of our programs on wind, solar met the guidelines that allow for the benefits of IRA. So we're able today really to have turnkey solution to the client on anything that we've seen so far out of the IRA. So I do believe that it benefits us in a unique way, but all that said any long-term guidance that we had given earlier in the year we standby it and it was without the IRA. So it's been [indiscernible].

Yes, that leads to my next question, which is the targets that you put out, the [ 8 to 9.50 ] and if you use capital deployment [ 9.50 to 11 ], so again, obviously, you're confident but to what degree? Because I think the interesting part of your story could be I think people appreciate the secular growth. But can we use our balance sheet more so you could be viewed somewhat more as a compounder -- you know what I mean, just sort of like relying on the growth tailwinds ahead. So how would you -- how do you characterize -- how would you think about that? Because at some point, I think the risk with your name or at some point, people get worried, you've grown so much, your revenues are getting bigger, like at what point large numbers start to be an impediment, just to the top line and to the bottom line because you've grown so much, right?

I think the company is unique in many ways because we can grow double digits as long as we get all leverage of the balance sheet that kind of de-risks the floor, macro trends certainly gives us opportunities, yes, on a CAGR basis, but if you had a year or period of year of non-growth, you would see cash flow come in significantly than the opportunity to buy stock use it for M&A, however you want to use cash, but it's inverse. So anytime you have a flat year, you're going to see cash flow just or if it goes down a little bit. But on a CAGR basis next year if you're growing and it will go back out. But in general, that's a good way to de-risk the growth on the EPS, adjusted EPS and there'll be opportunities, we'll continue to invest in M&A. We kind of think about $400 million a year, we had stock buyback, we try to stay agnostic to the share count, even if we use it, we're going to try to stay there at a minimum. And just stick sources and uses of cash, there's tons of opportunity for us in the spaces that we see and we'll deploy it in an opportunistic way that benefits the stake shareholder.

And then, Jayshree, could you just provide an update on sort of cash flow? I know there were a couple of contracts that were weighing down cash flow in 2022, so any insight into when we should see that moving in your favor and any opportunities longer? I understand the cyclicality of your cash based on if you're growing your business or not growing your business, but are there any sort of internal, I think that you can do to improve like structural things you can do to improve the free cash flow of your business over the longer-term?

Yes. Hitting the Canadian project, yes, I mean we are working through that as we said in the call that this is typical for the types of projects that we're doing in Canada, it will take time to work through it, because construction is still continuing and the way it operates in Canada is you need to get through that. So we believe by towards the end of next year, early '24, we'll see that position really moving in the right direction as far as cash flow, yes, absolutely, but I do think it's important to stress that growth does impact on free cash flow, especially in our legacy business, and in '22 we saw that $1 billion of additional growth in our legacy business, cost about $100 million worth of free cash flow pressure. So I don't want to agree that we've talked about it, but it is an important statistic in our business just given our self-performance model, you will see growth continuing to pressure that. Blattner, of course, the opposite, Blattner didn't have a growth year this year and that also pressured our free cash flow conversion. However, as Blattner will continue to grow and especially given the forecast, we're thinking over the next several years that cash flow will come in and you'll see our free cash flow conversion improve. But in terms of what are we doing internally. Of course, we're always going to try to work on improving our free cash flow. We're not just sitting back and saying, okay, this is what we can do, but we're looking at how to be more efficient with our capital, CapEx. We look at our contract terms and trying to make sure that we are continuing to push our customers and improving our DSOs, all those things will keep working on, but again, it is important that you realize the backdrop is you still are in an industry where our customer base, as well as our self-performance model, will create some pressure on that.

Okay and then the last 20 seconds. Duke or Jayshree, one of the pushbacks I get on your stock is it's worked you've re-rated, I mean, like what's left from here, like what do you think investors underappreciate about your stock or do you think the market appropriately is valuing you?

I mean I think for us, we see long-term trends, we are able to grow our adjusted EPS at double-digits plus, plus, and using all over to the balance sheet. I just see a very resilient company against big trends. The area if you think about the solutions around wind, solar, renewables, batteries, battery penetration, where we sit in that channel and provide them that solution is much greater than where we're at today and I think we continue to believe that we will not only are we doing well now, but the future is like, I am unwilling to tell you what the top line is because I do believe we have the opportunity to grow much larger than we are today.

Okay, well, thank you so much for coming to the conference and continuing to support the Credit Suisse Industrials Conference. Great job.

Thank you.

Thank you for having us.