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

Thank you for joining us this afternoon. My name is Justin Hauke. I'm the Senior Research Associate heading Facility Industrial Services here at Baird. Presenting next, we've got Quanta Services. Quanta is the 800-pound gorilla in the power delivery space, very large specialty contractor often imitated, never replicated. And we've got Kip Rupp today, the company's long-serving Vice President of Investor Relations. He's going to give us a couple of slides, just an overview to level set everyone and we'll do some Q&A as fireside. So Kip, thanks for joining.

Great. Thank you. Appreciate it, Justin. Thanks for everybody in the room for your interest as well as on the webcast. Like Justin said, I'll just flip through a couple of quick slides for anyone who's less familiar. We'll dig into the details. Investors, legal disclaimers. So just from a few key takeaways we'll get into it. As Justin said, we're a leading specialty infrastructure solutions provider, somewhere to the utility renewable energy, communications and energy industries. About 80% of our revenues come from providing services. We're the largest player in North America building and maintaining the power grid. We're also a leader in building renewable generation. We've built about 25% of all the utility scale renewable capacity in the United States. So when you're thinking about the energy transition, electrification, moving to a lower carbon economy, et cetera, we really sit at the core of making that happen through power grid, through renewal generation, et cetera. So as a result, we're exposed to some really nice long-term kind of megatrends, if you will. Things like utility grid modernization, system hardening, renewal generation, I mentioned, integration of electric vehicles, et cetera. One important factor that is a real differentiator to our business is that we self-perform over 80% of the revenues that we do. So that's important because it's our operating companies, our leadership, our people, we're executing on the jobs. It helps us execute better, manage risk, clearly from an on-time on budget to the client, which is important. We're much better able to deliver at that because we have control of the labor that's executing that work. So when you look over the past 7 or 8 years, we've had a really nice delivery from a financial results perspective, double-digit top line growths, margin improvement, that's helped us deliver over 20% adjusted EPS CAGR over that time frame. This slide, you'll see here, these are 3 reporting segments that we have: Electric Power; Renewable Energy Infrastructure; and Underground Utility and Infrastructure Solutions. And then what you see on this slide is just some of these kind of mega trends and dynamics that I referenced and how we're exposed to them, which we'll get into. Here's another slide just showing the 3 segments with estimated revenue breakdown of this year. Importantly, I'd guide you down to the bottom of the slide. Across what we do here, we're able to address the entire life cycle of infrastructure. So that's from the planning and engineering side of it to the construction and installation of that infrastructure, maintenance of it over time and, of course, the replacement of that when it's time to replace it. So we've -- fortunately, we've been very successful in delivering shareholder value over the years. But I think in many ways, we're just getting started. Tremendous amount of opportunity going forward. So these are some of the dynamics or some of the things we're looking to achieve over the long term to continue to deliver shareholder value. So with that.

Great. Thanks a lot, Kip. And I forgot to mention, so any questions. First, we will have a breakout session afterwards. But if you have a question [email protected], and we'll integrate those as they come in. So I want to get into each one of the business lines and talk a little bit about each of them, but maybe just starting big picture. One of the things, if you haven't looked at Quanta, I mean, you guys are still -- you lead as a contractor, but you're much more than that, you've integrated the business. Just talk about the kind of the strategic change and how you've maybe pushed more of that embedded with clients and the visibility and the MSAs that you have and how that's kind of changed over the years?

Yes, certainly. I mean, we certainly do not think of ourselves as an E&C or as a contractor. We really do view ourselves as an infrastructure solutions provider to our clients. And that, to your point, didn't happen overnight. I think our leadership team has done a tremendous job over a long period of time thinking very strategically about what's to come. What's to come in our end markets, what's come in our customers' needs and really focusing on the client. Not worried about what competitors are doing, but focused on the client and then it solves for itself. So we're always looking to innovate and expand the capabilities that we can provide. So the Quanta certainly of 1998 when we came public is very different from 5 and 10 years after that versus where we are today as we've evolved our business to be not just building and maintaining infrastructure but really providing the solution to the client for a lot of the challenges that they're facing. And so it's a tremendous dynamic industry that we're in right now. Record levels of CapEx and OpEx that utilities are spending every year. We talk about energy transition, all these wonderful megatrends. You're just starting to see that happen. And so a lot of our clients and our end markets are in a great circumstance, but a challenging circumstance that they've never been in before. And so we've really tried to stay ahead of that and be in a position where we can help them do that and be successful. So we're started really the core of what we do is construction. Over the years we've tacked on engineering, program management, what we refer to as front-end services. So we're able to really touch a holistic part of our clients' CapEx and do more for them. So as I said, that's -- what's really helped us, I think, evolved into a solutions provider and not just a contractor.

Great. All right. So I guess starting because it is the biggest business, starting with electric. You talked about some of the secular trends that are driving it. I mean, maybe you can just level set people on kind of the size of the market, what do utilities typically spend on transmission annually. We've got all this stimulus funding that's coming in, which -- from the IIJA. But even beyond that, the drivers are kind of there beyond stimulus. So maybe just talk about what are the mega drivers, how they're kind of integrated with each other? How do you guys position market share in that?

Yes, sure. I mean it depends on how you slice and dice all that. But if you kind of look across the end markets that we address. I would say the annual spend is hundreds of billions of dollars just annually based on kind of what we know today, not counting for all these wonderful things that we're talking about or what's the impact of the IRA on the energy transition, et cetera. That's just additive to it. But I think...

And that's total grid spending, so transmission distribution.

Yes. But I'm thinking even renewables, telecom, other aspects of system modernization and then when you get into what's it going to take to -- not even nearly get to, but try to transition and move towards a more lower carbon or carbon neutral, whatever you want to call it economy. And that's measured in the Ts based by what anybody thinks. So when you think about what is it going to -- how much transmission do we need to have to integrate all these renewables and move towards more renewable generation. I mean you're talking about doubling or tripling the amount of high-voltage transmission that's hanging in the air today that took, what, 100 years or whatever it is to get to this point. People are saying, well, we need to do that in the next 20 years, 30 years. I mean I think that's probably unrealistic, especially with the challenges to permitting, which is a whole another thing. But nevertheless, that's what people are trying to push to. When you think about integrating higher levels of electric vehicle penetration into the fleet of vehicles that are out there. Now you've been talking about trucks, fleet with the Amazons, UPS, FedEx of the world, school buses. You're basically talking about the need to rebuild the entire distribution system over the coming decades to accommodate that. There is no way the power grid is designed or capable today to do any of this stuff. So that's what -- that's what needs to happen to achieve this, getting to that is probably not going to be easy, smooth, it's not going to be as good as everybody thinks. It's not going to be bad. It's going to be something in the middle, and that's good. That's a good spot for us. That's the kind of stuff that we enable.

Yes. I mean it's one of the things I think that's different. People always ask about cycles but these trends are almost -- I almost think of you guys as acyclical because these are mega trends that extend for so many years. So it's not like we're looking at a 3- to 5-year spend. We're looking at a 20- to 30-year spend of opportunity that you guys have in front of you.

Yes, no question. I mean, especially with the IRA from the renewable standpoint, that gives long-term policy visibility that, that industry has literally never had. So that even trues up the visibility into that part of the renewable.

So what are the biggest constraints? I mean is it permitting? Is it labor? Is it supply chain? You guys have outlined that you think you can grow organically 5% to 8%, that was at your Analyst Day last year, you've actually been doing stronger than that. So is -- is the market a place where you think you can actually grow sustainably beyond those targets? Or what keeps us from having kind of a step function change from how you've grown historically?

Yes. I mean, labor is certainly topical these days. A lot of companies and industries are struggling with a tight labor market or challenges that they've never had to deal with before. I guess, in a bit of a good way, we've been in a tight labor market for 20-plus years. So there's really nothing going on today that's new or different for us. And we've gotten well ahead of it. I mean, just because our industry is in a great space and we are ultimately a people business, we've done a number of things strategically over the past 10 years to really be prepared for this and to get ahead of it, arguably. So ironically, perhaps -- and I'm not saying by any means it's easy, but labor is not necessarily our -- it's not our issue. I mean we're already doing the right things there. It's not to say if you gave me 4,000 linemen today, we couldn't put them all work tomorrow. You could. I mean there's that level of demand out there, but we're able to add the people to do the work we do. And clearly, as you said, we're growing very nicely to it. In the near term, supply chain has been just not constraining per se, but just a little bit choppy, right? I mean you look at high-voltage transformers in particular, probably 2 to 3 years out, even lower voltage transformers, the everyday stuff on the distribution system, we're never had problems getting those, and they're as much as 18 months out. So that just creates a little bit of choppiness and impacts your ability to be as efficient with your resources as you might otherwise like to be. I think that's more of just a near-term dynamic. Now the flip side of that is we're actually looking at that and trying to see where we can provide the solutions around it. You can sit there and keep your fingers crossed and just hope it gets better, where you can try to see what you can do to make things better for your clients. And so that's what we're doing and working on some of these things. So kind of stay tuned on that. And then what you mentioned, permitting, yes. I mean that's very topical from a political standpoint these days. I mean that's...

There were some steps that were improved with the debt ceiling. There's a little bit that comes into it that addresses some of it.

Yes. There were a few little things in there. The good thing is there does appear to be bipartisan support to try to get this improved because it affects all infrastructure. And yes, I mean, if they could make -- doesn't even have to be perfect, but if you could get a bipartisan effort to make some decent strides on some of the permitting challenges, that would just be incremental. I mean, we don't have any assumptions for any of these things. And you mentioned at our Investor Day, it's not in any of the numbers that were in there that was pre IRA. So certainly, anything from a permitting reform would be incremental beneficial. Just it gives certainty reduces risk for clients. It's just -- and that's the things you need to make this energy transition successful.

I mean we were talking about outside, but I mean just for perspective, you guys announced the SunZia project that you won, which I think collectively is the largest contract in the company's history. But I mean that has taken 15 years to, from conception to the point where they're actually awarding a contract.

So yes, it's -- that's exactly right. And some of these projections that you see out there are saying, well, to achieve x level of carbon reduction by, I don't know, pick a date, 2035 or whatever, we need to double the amount of whatever, transmission. I mean, it's just -- you can't do it under the current regime. As you said, 10 years is almost a minimum that takes get meaningful transmission projects from kind of conception to construction. So any help there would be helpful.

One more on this business before I move to the other one. But just on the labor, I think another thing that's unique about you guys that some of your peers that are public or private, and they've got scale businesses as well. But you guys -- you own a college that trains people. I think Duke, your CEO has talked about there's something like 26,000 people that you're training collectively in any given year and just how that's a differentiator. I mean how does that -- I mean, how do those people matriculate into being at Quanta?

Yes. And the college is a Northwest Lineman College or what we call NLC, and anybody who in the audience wants to become a line worker, you could go there. Go through that pre-apprentice program. And when you come out, it's almost you've accelerated your capabilities. So the time line that it will take you to go through that apprenticeship project up to journeymen linemen status is kind of accelerated, which normally it could take as much as 4 years. If you're good, it could maybe take 2. But we found that people who go through that program and then tracking their career, something like 90% or so of those folks stay in the industry; versus the more traditional routes, there's a 50% dropout rate. So there's no question that training properly and getting folks out into the field when they're capable off the bat really helps their careers accelerate. And so we view NLC, and of course, we hire people out of there but they also -- they pay to go there. There's different kind of grants from the government, et cetera. They can go work wherever they want. But we view it as a -- as a leader in the space, we think it's probably very likely that someone going through there, even if they go to work for a competitor or a client, will someday work for us. And we would much rather them be trained the right way, safe, every day try to get them home to their families.

Are you finding that -- I mean, there's a skilled trades shortage everywhere, but are you finding more people are coming into looking at a [ linesman ] because of the visibility that the industry has versus commercial construction, for example and...

Yes. No, I think there's certainly an element of that. There is an element, particularly with the younger generation who cares about the energy transition and moving towards lower -- more renewables, et cetera, that wants to in a way be a part of that. So I think those all kind of play in and have a role.

All right. Let's move to the Renewable Energy segment. You guys did the largest acquisition in your history about 1.5 years ago now, almost 2 years, Blattner. So Blattner, talk about Blattner, what's their market share on building renewables? Who are they as a company? And why were they a good fit to kind of complement what you do in power delivery historically?

Yes. Blattner is a fantastic company. They're a family-owned and operated business for, I think, it's about 115 years prior to joining Quanta. And they have built 25% of all the renewable generating capacity that's operating in North America. They've been involved in wind and solar, the renewable generation side from the beginning. So 1 out of every 3 wind turbine that's hanging in the air, they built. So they've really been in for a long time. We really -- from an acquisition perspective, only by quality. We don't do turnarounds and fixer-ups. We look for the best we can find and Blattner no doubt meets that criteria. So they've got a great client base. They're very high quality, all the leading renewable generation companies. It's really kind of a bespoke client list that they've developed over time. So that gives us really a great leadership position in building renewable generation. But also works very nicely with kind of Quanta's legacy, if you want to call it, that transmission and substation capabilities. So when you think about building renewables and the interconnections of that into the system, we really have kind of a turnkey capability that we can provide. SunZia is kind of a poster child of that where SunZia is a 3.5 -- 3,500 megawatt wind farm and then 550-mile high-voltage transmission line with high-voltage DC converter stations on each end. And so we're doing the whole thing. So that's a really good example of how we're bringing the entire scope, full turnkey approach to the client for a solution for that.

And then I think -- I don't know if it's a controversy, but it certainly is something that people ask more about is the margin profile of the renewables business just because electric is your highest margin business. Some of that is because the master service agreements and the fact that you don't have constant mobilization, demobilization. I know that you guys have talked about renewables being a double-digit margin business. Acknowledging that it's a little bit lower today because of the supply chain issues. But maybe just talk about their historical execution, what gives you confidence that the margins can be kind of at the corporate average overtime?

Yes. I mean in our Investor Day, we kind of -- we said we're looking for like a 9% to 10% operating margin for that segment. So keep in mind, you've got Blattner in there, building wind and solar, et cetera, but you've also got transmission and substation work that's directly associated with supporting renewables. But how are we confident to get there? Well, we've done it in the past. We meaning Blattner historically has, on average, operated at a 10% or better EBITDA margin. And certainly, the transmission and substation work that we do there has done the same bit in that. We've resegmented last year because of the acquisition in the 3 segments before that transmission to substation part was in our Electric segment. And you say you can see historically how that was. So I mean, long story short, the confidence is because we've delivered on it in the past. And as you said, there's been just some choppiness with solar panel access and different other things that has kind of weighed the margin down a little, but you really haven't even begun to see the earnings power of that segment in our view. And I think you should start to see things improve as we move through the balance of this year. And then knock on wood, things continue to normalize. And as the IRA starts to kick in, in '24 and beyond, I think that's where we should see the potential.

And that's a good point that you talked about that it does have the electric [ elements ] in it because I think there's clearly been more market entrants. And there's been other civil contractors that are moving into doing renewables business and everything, but they don't have the power delivery and the integration aspect so that's a differentiator too that kind of supports the margin.

Yes. I mean it is not -- I mean, SunZia really is kind of the total package, that's kind of a poster child. But I mean that's not going to work for every project. But nevertheless, I mean, we've got a solution and a capability that is unique, I would say, and proven in the market that for the right customer, right client who likes to -- who thinks collaboratively, wants to be -- leverage the capabilities we have, we can deliver a great solution for them.

All right. So the underground utility and infrastructure solutions business probably doesn't get as much attention -- but it's -- and it was pressured with the downturn, but it's come back really strong. Margin contribution has been great. Talk a little bit about the relative mix of that business. What Quanta does, how you're different? What that brings to the portfolio?

Yes. I mean, I guess I would say up front that there's still especially folks that have followed us for some time. There's still a little bit of perception that all we do is build pipelines. And we've actually really kind of reconfigured that segment pretty meaningfully over the years where we still have the capabilities to build larger gas pipelines and things, but it's much more of a minority of the business. Maybe we're $600 million or so of revenues of those kind of larger projects. Really about 2/3 of that segment's revenues comes from end markets and services that we've deliberately tried to -- that we consider more repeatable, sustainable, visible. So meaning a lot of that is driven by regulation. A pretty good amount of that segment's revenues come from providing maintenance and replacement and really modernization services to natural gas or gas utility companies that are digging up their many decades old gas distribution system that has methane emission leaks, they have safety issues, et cetera. And they're modernizing that to newer materials. So that's regulatory driven, very visible. It's going to take decades for that to play out. We do pipeline integrity services, which again is driven by regulation, making sure that pipeline infrastructure is environmental safety, other compliance. And then we do some specialty services at the -- mostly for refineries around liability, maintenance, environmental compliance, et cetera. So kind of the aggregate of those 3 is about 2/3 or so of the segment. You've got some pipeline construction, the larger pipe stuff, some smaller pipes stuff, and then various ancillary services. But that part of the business, too, is one that has exposure to energy transition dynamics when you think about hydrogen, potentially carbon capture, and those sorts of things, the services -- some of the services we do there is could apply to that.

Right. And I was going to ask that next because more or less you're [indiscernible], it doesn't really matter what goes through the pipe. It's the same skill set. So you're agnostic to it, I guess.

Yes. Generally, that's right. I mean there's -- like anything, there's always nuances to it. I'd say carbon capture is a little bit more near term in real. Hydrogen is still early, and there are some challenges putting that through pipes that they need to be figured out. But we're around the edges on all that, working with our clients on how they're thinking about some of those opportunities.

Fair enough. I've got one from the audience when we get to that in just 1 second. I think maybe asking you a CFO-type question. So the balance sheet is kind of at the higher end of your leverage because of Blattner. But also you've had some things that kind of weighed on cash flow that you guys have been kind of vocal about. Maybe just talk about the capital allocation from here, free cash flow conversion, which you guys target, and the opportunity for some of the collections on some of those jobs that held back.

Yes. Maybe I'll start with question number 2 first. One thing that's important to understand, as I said, we self-perform 80-plus percent of the revenues that we generate. So that's our people out in the field. So when our top line is growing beyond, say, a 5% number, we're adding headcount. And those guys are getting paid every week. So there's just this delay, it's just timing of working capital increasing as our growth rate accelerates, and we're bringing on more people versus when we convert that work through the whole process with our clients of getting paid. So if we're having accelerating growth, we're going to have our cash flow being pressured a little bit from working capital. Conversely, which you saw in spades in 2020 if our revenues are flat or they go down a little bit, cash comes raining in the door because that working capital goes the other way. It's a great model actually because we should be -- if we're growing fast, we're going to generate EBITDA growth, earnings growth, generating value that way. If we're growing slower, our revenues were down for some reason, cash will be coming in the door, we can redeploy it into M&A, we can redeploy it into stock acquisitions or whatever, stock repo or whatever we want to do -- I forget the first part.

I was going to ask, I mean, you've got these Canadian jobs that have weighed on your DSOs...

Yes. Yes. And that was COVID-driven. And really, it's not an execution issue. To the contrary, nobody could have executed through 2 years of COVID on those jobs and done what we've done.

Remote?

Yes. I mean the remoteness of Northern Ontario and the complexity of it is -- cannot be understated. But so we were able to do that for a client. It obviously required different changes in work schedules and how we do things, higher costs and so it's just been a process of documenting all that and working with the client to get those reimbursements in. That's all going very well. We had a great construction season over this past winter that we really executed tremendously and that further solidifies a lot of things that we're pointing to. So we're confident -- we don't have any projections of getting that taken care of this year. You would expect next year, we're over 90% done with the project, so we should get that wrapped up and buttoned up.

But it's -- I mean, it's a meaningful amount of cash collection. It's $150 million, $200 million, something like that.

More than that. I mean when we get it, it will be really nice.

So that's a 2024 opportunity. And then I guess maybe the last question on that side of the balance sheet and the capital allocation. You guys have -- historically, you were entirely M&A driven, but you've got a dividend now, you've been doing buybacks for the last several years. But M&A is still a meaningful part of your portfolio. I mean, you did $500 million revenue contribution just this last quarter. What is the M&A at this point? What does it bring? What is -- because you're already at scale, so what do you look for in M&A?

Yes. That made me -- reminded me your original question was about leverage. We were at about 2x at the end of the year -- last year and then we popped up a little bit because of some of the acquisitions that you mentioned in January to about 2.5. So we certainly have a path to 2x or below, which is really kind of where we think is a good place to be. Not that 2.5x is overlevered by any means, but we like to be opportunistic. To your point, we want to be able to do select acquisitions when we see them. If we want to rebuy our stock, we can do that aggressively if we choose to or both. So we really like to have the optionality and a strong balance sheet to position us to do it. Really we're looking at great companies that are well run, typically, they're family-owned, multigeneration, we really like that help us achieve our strategic goals that would be more challenging to do from an organ standpoint. There's a number of different things that could be a good traditional transmission and distribution company. We did an acquisition earlier this year that was around kind of supply chain, but really kind of aggregates and concrete. We already -- we pour like something over 2 million yards of concrete a year. If you think about foundations for renewables, transmission, what have you. So a lot of work to be done out in the West for both. And so that's ensuring we've got the resources we need to do that at a good price point. So that was strategic. So my point is there's a wide range of different strategic things we look at but it's an opportunistic approach. There's no pressure on the system to do deals. It's just really what do we find that makes sense for the right price.

Well, I think we're kind of up against the end of our time. I know there were a couple of questions on labor. We did touch on it, but there'll be the breakout session, and I think that's definitely a topic to continue to elaborate on there. So Kip, thank you for joining us. I always appreciate it. Thank you, everyone, for joining the session.