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

Okay. So good afternoon, everyone. My name is Chad Dillard. I'm the lead analyst here at Bernstein covering the machinery sector as well as engineering and construction. And I'm really excited today to have Quanta Services. It's the largest contractor that builds utility-scale renewable facilities as well as transmission and distribution infrastructure. And joining me today is Duke Austin, the CEO and Jayshree Desai, the CFO. And so if you have any questions, please feel free to write them down in Pigeonhole, and I can ask them on your behalf. So before we actually get into like the full Q&A, I just wanted Duke to like really quickly, just give a high level kind of 30 to 90-second overview of how to think about Quanta.

Yes. Thanks, Chad. Thanks, everyone. I appreciate the interest in Quanta. So when you think about Quanta, really, we're around cross-skill labor. And so that nucleus is why we believe we can provide solutions to utility customers, renewable developers, our industrial business. As everyone transitions away from carbon footprint, and we're also seeing many different things around data centers and load growth that we believe we sit in a really unique spot to provide certainty. We've bolted on engineering, we've bolted on technology, different kinds of things around the nucleus of the craft. Uniquely, we self-perform about 85% of the business. I think that really separates us. And Sean calls it a contract, it's a dirty word for me. We're a solution provider totally. And so in general, I think that is right, that's the evolution of what we've become is we were a contractor 10 years ago. And we -- what I believe is how we differentiate is we provide that solution in a collaborative manner to the client, and that's where Quanta sits today.

Okay. Great. So Duke, I remember, I think it was back in like '22 during your Analyst Day, you talked about like the long-term growth algorithm of Quanta being plus 6% to plus 8%. So at that time, we were in a world of 0 electricity demand growth. Obviously, things have changed, right? We're starting to see an inflection in electricity demand growth. So in that world, how should we think about Quanta's new revenue growth algorithm?

Yes. So I do think you're right, it was the whole like 2 decades of negative load growth, some of the reasons why you've seen decoupling of T&D assets versus generation was around negative load growth. And when we went through Investor Day, we talked a lot about it. Fundamentally, I don't think the business has changed on how we think about it from a strategy standpoint. I do think all those things are intact. Yes, daily, you've seen IRA, for example, came into wind and solar. I think that's helped. It's benefited. It's gives certainty to our developer -- development customers. It created demand. We've seen -- now we've seen hyperscalers come in. We had been talking about data center development for a long period of time, never at this pace, never at this kind of demand. I don't even think we understand yet what that means as far as how much is that EV penetration, has it stopped? Has it started? Where is it? We're still in the front row of that. We see it every day. We see it from West to East. We're able to really talk to the clients about what we see in that demand. And the way -- I think it's there. We have decades of growth in front of us. It's probably the most prolific time for generations in the business came up through the field. Never seen from my standpoint, more change in front of us. And when you look back, we have a unique position to really sculpt the way the energy infrastructure looks over the next 20 -- 20, 30 years. And so you can't be more excited about being in the business. And then from a utility standpoint and then -- where they stand, the demand on them, yes, it's difficult. Yes, it's hard to change, but it's necessary to meet what's in front of you. And I think it comes at you daily, just every day, it's something new for us and how we get involved and how we get involved in the infrastructure and really try to provide solutions. Exciting times for us.

So I mean if you listen to like the regulated utilities on the earnings calls, it feels like a switch was flipped overnight about them waking up and realizing that you're seeing this new level of demand. You've been in across the table from like all these utility executives. Can you give us a good sense for what they're saying? What are their pain points? And how Quanta is helping address them?

Yes. I mean, we do sit in a unique position, and it's really -- I think what happened -- you first saw it show up in Virginia, and you saw a load. And well, we can't meet load in Virginia, which is pretty much unheard of in the business to say you can't meet load. I was shocked by it, honestly. But when I started to see what the demand was, it was like, wow. It was in Arizona and same thing. And so you really just sat back and went, wow, this is getting real. So you're looking at it and you're trying to see, okay, what is really causing this? And then you could get your head around everyone is moving around. And then I guess, probably, I would say, third quarter -- end of third quarter, NVIDIA came out with new chip, everyone started talking about AI, the impacts and then all of a sudden, across from Tennessee to California, everywhere in between Texas, it doesn't matter where there was 3 gigs showing up, 4 gigs, 5 gigs, 7 gigs of demand like now. And it was about data center development around AI. Everyone like just went whoa, including me, I thought from my standpoint, I've never seen something show up so fast. And how do you deal with that becomes a challenge if you're sitting in as CEO from a utility and you're seeing this, you -- for me, I'm jumping up and down and going, "Oh, my god, I got 24/7 demand, let's go, let's go, let's go." Right. Except you have a regulatory -- state regulatory body that you have to get structured around that you don't want your customer to pay for the infrastructure necessary to have redundant system, meaning 2 directions of load to serve a client that the demand's spotty after 4 years and it creates some inefficiencies and saying that, so that was the issue really, I still think today when I think there is affordability at the consumer. Like what does that mean? Do I pay for the data center as a customer of XYZ utility? I've seen it in pipe. I've seen take or pay. I've seen all kinds of things. But essentially, I think when we think about tech and we think about our utility customer, we've said all along, you have to collaborate like that has to be -- even EV -- how does GM collaborate with the utility industry is necessary for everyone to sit down and say, okay, how do we build this infrastructure the right way for the client to have a good policy. But states were in the middle of it. And I do believe what I saw in the first quarter was the utilities really lay out how they were going to -- one of them was 26 gigs in Ohio, and I saw how it laid out that demand and how they're going to pay for it for the first time and talk about how it's neutral to the rate payer. It has to be neutral design to the rate payer. I do think the more demand you have, it's certainly your bill becomes less -- it becomes cheaper. And that is the case but still early on and throughout you have to make sure you cover off that infrastructure. And I -- and we're seeing that show up in almost all the rate cases in the rate. And I think tech and utilities are working very well together now. So I'm optimistic that that kind of piece of it is out of the way at this point. For the most part, it will continue -- you do have a semblance of a road map of how you do this within the industry, and it usually falls into place fairly quickly. So I like where we're going as far as that goes, but the concern was very real early. And I -- when you look at everyone's budget, which I think for us, the easiest way to kind of think about Quanta is you start -- first off, you start looking at utility budgets and are they moving up or down? And if they're moving up, we really are backstop as those budgets. And we're really performing behind them and collaborating with them on those budgets. This -- all the budgets and all the movement upward no one's seeing the impact yet of what it means for AI to come on the system. So I do think when ultimately, you'll see some incremental demand, I know you will, incremental demand from us and our clients because of the capacity constraints and that you're going to need a significant amount of transmission.

Okay. So I guess, if we kind of think through like a time frame, we had our whoa moment in the last like 6 months, right? And then you've evolved into having conversations about like how to pay for it. And so how do we think about when that translates into actual contracts, awards, revenues. Can you just like lay out that time frame?

I mean it's ongoing. It's -- when you walk back through our MSA business and when you see our backlog may be flat or it may go down a little bit, whatever it may be quarter-over-quarter, year-over-year even, it's ultimately the way that our MSAs fall into place and what that looks like. The demand, our head counts are rising, all those kind of things are there. And I think it shows up now. I think it's already showing up. You're seeing some switching, I think EV has kind of moved out a bit, but you're seeing some switching from transmission into distribution. But the demand side, there's no mistake that loads growing will, I believe, double fairly quickly on call it 10, 15 years, you'll see load double. And that's hard to say from someone that's seeing negative load growth for 20 years and to say it's going to double. We've been calling it for a bit and Elon will say probably triple or more, we will say. But I -- we can see it certainly, and I think us to get our head around how do we get enough generation to cover this off, us being renewables. So a lot -- a lot of conversations around primarily tech with like renewables, we build about 25% of the renewables in North America. How does that interrelate into transmission and all the way back to the data center. So we're in a really unique place to kind of bridge some gaps here from a developer standpoint and into the utility.

Got it. Okay. And so in terms of like the CapEx mix for the utilities, you've got generation, you've got transmission, you've got distribution. Do you see that pool of capital moving from one area to the other. And does it matter at least from a Quanta standpoint, where that ends up?

It doesn't matter. From our standpoint, we saw 2 or 3 customers this year, a big transmission builds in, call it, the first month and then immediately switch into transmission. We immediately moved distribution resources and pulled in transmission resources. And I think that's gained some market share, by the way, on the way out. So I think it's really good for us. It doesn't matter either way. I do think when you look back, the West has -- because you have fire hardening, you have EV penetration about probably 70% of all EVs are sold in California. The West -- well, in the U.S. And so that said, you're really penetrating at the distribution level, plus fire hardening plus interconnections and load growth and data center. So there's like 6 things coming out at once. And so that is like the place for me, it's kind of at the center of the transition. They're further along than anyone else and the mandates are there. And so I'm watching them, watching what's doing to the distribution system, it's certainly pressing. There needs to be capital spent there. So it's a finite amount. Everything is necessary. And you have affordability coming at you all at once. And I think you have to be real creative here and really work with the regulator at your state level -- at the state level and how to get this spend done and we're certainly a part of those discussions.

Got it. Okay. So can you just talk through how Quanta gets involved in the development of a data center from like a frontal view perspective? So maybe you can talk about like what your scope is, when does the dialogue begin and are you actually starting to see like conversations directly with hyperscalers?

I mean I think for us, primarily how we get involved today is it will be with a customer around renewables siding. We will get involved or transform vertical supply chain, something if you want to pull something in, we can absolutely like help with transform capabilities, but really supporting one of our renewable customer developers to -- because everyone wants a renewable piece of it and that's how it first starts and then how do you get the line and then how do you interface into the utility. So all those things are constantly talking to either directly at the hyperscaler or with the developer and we really play the role from -- we'll build a generation typically around it. And then all the way up to, call it, the substation that goes into your data center. We can build the industrial piece some inside. That's not been something that we've really focused on at this point, but we really stop at the high voltage side of the hyperscalers.

Got it. Got it. Okay. So it's been about 2 years since the IRA has been signed into law. So based on your conversations, like where are we in terms of like deploying funds? Are we like 10% deployed, 15%, 20%, 30% just from your perspective?

I want to say what Jayshree says. What do you think?

So my perspective is the IRA is in place. I think so much of the IRA -- there are several facets of it, but so much of it was around extending what was already a great way to incentivize renewable development on the solar and wind side, they gave -- that IRA bill gave certainty around the time frame of what that credit could be, took away sort of the worries of fits and starts around PTC and ITC extension, that was put aside. And so you've got developers who have a great pipeline, 20 years, sometimes 10 years in the making. They've got projects now that they have line of sight and visibility around what the value prospect of that project is. So I think that part of the IRA is already in the works. And because it wasn't a big shift in what was how the industry grew up, there wasn't a big change in how developers thought through it, right? They're just using those credits as they've always done, figured out they have the financing around it. I think the transferability rules around the IRA have really finally started taking shape. You're hearing the big developers Xteras of the world, et cetera, who have figured out or really worked hard in making that a much more liquid market. And that transferability allows for just more liquidity around credit. It's just going to help drive more work and ultimately, hopefully, should drive some costs out of the system around the financing of those things. So that's starting to happen, which I think is a big benefit. And then you finally have all the rules around what the adders around the tax credits, like domestic content and what that means, that's come out too and come out pretty favorably for the developer. So I think all that is good news and is allowing the market just to continue to have that visibility. There are some aspects of the IRA that haven't quite yet sunk in. I think that's around the newer technologies, whether it's some of the hydrogen plays or some of the -- even the manufacturing credit, maybe some of the RNG plays. Those are not necessarily because the IRA isn't effective. It's just the commercialization around those technologies still have to mature. But once those do, then it's just taking advantage of the credit. So I think they designed the IRA actually quite effectively, but the market has to be ready to be able to absorb them. And that's why I think you see more success around the wind and solar side than some of the others.

Got it.

I do you think the more mature developers, your larger developers are way farther along than others and how their thought process. The transferability piece of this dwarfs everything else, in my opinion, because you already knew you had 10 years, it's how you got the PTCs and what -- the tax credits and where they're going, I think, really starts in a meaningful way. Not to say it's not already started but pushes it much quicker, faster. Now that you have some guidelines on the tax cut, I think we're very early.

Good. So I have to ask because of an election year. So let's just assume there's a change in administration from Democrat to Republican. How do you think -- this is just a lens of -- through the lens of IRA. If some or part of that goes away, how does that change your growth algorithm in the medium term?

I'm primarily thinking '26, '27 already. I feel good about '24. I feel good about '25. Actually, I feel good about '26, '27. But I think it's going to be outer years if you're impacted because -- and we're not in like marginal things around the IRA offshore wind, look, we support it. We're building some onshore capacity there with lines, but they're ongoing. So I think through like what -- what's -- where the lining the same going to be? And we had tax credits before. I don't see an administration would come in and take tax credit away because it would really -- that would be the worst thing they could possibly do to the industries, those tax credits. I think everything else, I'm not too concerned with. And I spent 15 years under separate administrations or more that have operated through this. Yes, we're a little farther along. Yes, it seems to be a political football, but there's a lot of political football always and a lot of rhetoric in an election year, I'm not too concerned at this point. What it means for us utility back, the tech push. There's so much demand for energy, electric energy right now. I think it's just a catalyst per se, for anyone if you want to make an election around whether you're EV or combustion, things like that, I mean, I just like I don't think it's something that bothers us at this point. I think we pushed through these kind of things in North America.

Okay. So maybe now is a good time to talk about some of the bottlenecks we talked a lot about the growth. So I guess maybe first on labor. How has the tight labor environment changed the conversations you're having with like your utility customers? Maybe you can talk about if there's any change in like hard bid contracts. And you talked about '26, '27, but like how far out are you actually having discussions about just labor availability?

I mean significant discussions longer term around builds and unknowns. I think a lot of it has to do with you're starting to see MISO, you're starting to see all your RTAs, your regional transmission authorities start to allocate work and start to think about transmission load, interconnections plus what they already have ongoing in their systems. So as that becomes more and more prevalent, at those levels, we need to align from a constructability standpoint, we'd like to be early on in the projects. So it continues to get, I would say, at a good pace for us. And the discussions were much earlier than they were in the past, and I like that part of it. I think it allows us to plan. It doesn't mean you won't get -- if we can be nimble, if we can stay nimble as a company and think through it and just stay aligned with the client, understand, then we can move, and we can be efficient. That will be the key to it. Longer term, longer-term contracts, different players within the -- your competitive markets, I think, are there. You're starting to see things show up with your corridors come out from DOE, your allocations from FERC. I think all that really just stacks on. 85% of our business is off MSAs. You don't even -- it's every day occurring. We're talking to them on a daily basis and now you start stacking on your larger dynamic projects that a lot of times, our existing customers in a competitive environment. And so it's different from our standpoint and their standpoint. The way they finance, it looks different. And lot of different things when you're in those environments. So I do believe we sit in a really nice position to collaborate with them and build capacity around what we see and stay in front of the markets with the labor that we believe we need to train. When you get down to distribution, I think it's more difficult for us to pivot from -- when I say that, it's a different cloud -- I mean you're training something that is inherently dangerous. You're in -- you're inside of hot corridors all the time. Transmission is heavy, not to say you don't have some hot corridors, but it's easier to train and transmission, just dead transmission, than it is in distribution. So it's different on each one of them. I do believe we haven't ran into a place. I said this morning, I was like please let me say, mercy, one time in my career. I've been in 30 years and 4 generations, I've never seen one time where we haven't been able to meet the demand. So labor, I believe we'll be able to meet the demand of labor. I worry more about manufacturing capacity, rate structures, anything else, permitting, any of those things would get in a way before, I believe labor from our standpoint would. I think we've done a nice job as a company with our colleges, with the things that we've done from unions to trade associations to prepare ourselves to provide certainty to the client. We know our role in this. We know where we're supposed to be here. And we can stay behind and collaborate as long as they can give us a little bit of guidance somewhere they're going, we can certainly meet the demand. And I like tight labor markets, please bring them on. I love it.

So I guess like with that -- with the tight labor market, I mean, further part of the business, it's not MSA. Are you able to push a little bit of price or maybe not necessarily that, maybe more on like the contract terms in terms of like just risk, like who shares the risk. Can you give us a little insight into how that's changed?

I mean I think the terms -- I mean, it depends on what the market is and where you're at and what you're doing. Utilities you can deviate a little bit. But in general, we're a little bigger. So we've got all kinds of different issues. And so we'll certainly get in there and have a good conversation and get a fair contract with them. That said, they know that we have to get out a little farther with equipment, things like that. So we have to work together on who's buying what we see more EPC, engineer, procure, construct, where we're certainly buying heavy equipment. We -- we're not going to buy something and not have payment upfront, things like that. And good turns back to back, don't like commodity risk, all those kind of things. So that piece of the business, we don't want to get rate -- I mean, risk shifted to us that we can't handle. And so I think, we've been there, done that and not doing that again. And so I think that part of it is something that's changed a bit how we contract through EPCs is much different than an MSA. So that's there, but it's incremental to the MSA. And you can just continue to get things thrown out yet, can you do this? Can you do that? And our answer is usually yes. Our vertical supply chain that we're working through today will certainly be something that I think is incrementally positive to the client, like how we manage supply chain or call it, top 5, 6 buyer of HV equipment. So when you think about that, really have a chance here to internally work on vertical supply chain to create margin for ourselves and as well as help our clients manage that supply chain. And we've learned a lot about it. I do believe that's certainly a catalyst for us. And it's necessary for the client and us to have flexibility in this whole bill that we see.

Okay. So I guess, maybe a 2-part question. First of all, how many people could you recruit today? And then secondly, can you talk about just like the avenues, right? So I think we've talked a lot about Northwest Lineman College and how that's like a great tool. But maybe you can elaborate beyond that, what sort of tools you have to recruit people?

I mean we're not struggling with recruitment. I think we have a list of -- probably a waiting list to get through the colleges, will sponsor some of it. Some of it is Jagran, it's a credit A college. We will fill Boise's stadium, basketball stadium up with 3,000 parents that are really happy to see their kids go through a full graduation after -- and it makes you feel good. It's a great trade. Our median wage is 70-some-thousand, pension, health and welfare. I'm proud of it. I'm proud of it. If you don't want an education, it's a perfect place to go to spend a lot of time coming from the field as well and making sure that we -- we want to be a place to craft wants to come and we value that. I've not seen us have that struggle yet. And I think we can put on -- we're putting on around 3,000 to 4,000 a year organically. If you look at year-over-year, you have some seasonality. You don't hold everyone when you are not -- don't have to work for it. It will fluctuate a little bit, but on the average, 3,000 to 4,000 people a year. I -- we struggle more with engineering, honestly, and I do it craft and it's like 1 to 100, but I still struggle with engineering capacity. I worry about that more so than I have craft.

Got it.

I'm sure the engineers would say the opposite. That's fine.

So let's talk about the other big bottleneck, transformers. So you recently acquired Pennsylvania Transformer Technology. Can you talk about just where you are in integrating that asset into your business? And what sort of advantage that provides you?

Yes. We worked on for a couple of years around supply chain, and we're struggling ourselves to -- our people are an efficient primary around Transformers. So when I sort of think through it, and you could see what was in front of you. We wanted to source a U.S.-based transformer company and found PTT. The facility is a 100-year-old facility. It's been 3 different name changes, but it goes all the way back to McGraw-Edison. I think when you -- when you think about today, where we're at, I mean, we're large 300 MVA type transformers, UL codes that have been through most utilities. So there's not really an issue of quality. We meet spec for the most part with everyone. That really is something that I think -- we can incrementally increase demand. Ravi, the owner was 84 years old. If he spent $1, he wanted $2. And like it was -- that's how it was. And I think now we can invest in it, we can increase capacity a little bit, probably call it 20% in that incremental -- the incremental build internally. I mean we really want to pull through, pull through substations, pull through line, help someone bring in a job quicker. And that would be, for me, like that's how we see the strategy with it is, can we with transformer breakers pull in projects that are on the bubble or whatever it may be, they want to bring them in and then we certainly want to build. So fundamentally, we want to build whatever they're bringing in. And that's kind of where we're at in discussions. I think it's gone very well. We like where we sit. I like the business independently. But we're probably less than 3% of manufacturing and only about this class and only call it less than 20% is made in the U.S. So not something I believe we're a transformer manufacturer by any means. We are learning around it and working with our clients in a more collaborative manner around transformers. So I do think there's opportunities to do a lot of things, but manufacturing, you wouldn't see us get vertical and start manufacturing everything. That's just not who we are.