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

Okay. I forgot to mention folks who haven't been here, we will do -- open up for questions at the end. So I think I've got 2 more. So on the renewables business, so there's been a number of companies that have had some execution issues in renewables. You've had very little. And just maybe you could give some color on how you've been able to do that? And just how are you feeling about continuing to do that going forward? And maybe Jayshree, I know that's an area where you're trying to get the margins up, do you have line of sight of achieving that?

You go first.

The short answer is yes. We have line of sight in improving that. I think you -- we -- Blattner and Cupertino, they're leaders in the renewables space. They've had a long history, especially Blattner long history with very strong developers, understand how developers think, how projects move forward, how projects don't move forward. I think as a result of that knowledge, they're able to manage their resources and equipment very smartly. We did have -- as we talked about earlier this year, we did have a hiccup on a couple of projects. This sort of ramp-up in growth that happened from '22, '23, '24, it was a lot. And there's obviously good things about it and sometimes there's not so good things about it. And that sudden rapid growth did cause us to be inefficient in certain areas. But sitting here today, our expectation is things are going to get better, they will get better. There's no reason why going into '25 and beyond that we won't be reaching the margin targets that we told that we laid out in the Investor Day in '22.

Steve, I think it's really important with Quanta is it's a portfolio of projects. Look, 90% of them outperform how we think about it. We operate through contingencies. Every once in a while you hear us call something out. Typically, I don't know, we'll call it out. But in general, we performed that quarter, we performed the year like we thought we would, but it's all about the scale and the way the portfolio works to derisk the investor and ourselves against these kind of issues because we're out, we're in inclement weather at times, we have imbalances at times that the company is able to just operate right through that. And the first quarter is always a little light and that's when some of these projects happen, but typically, we'll operate through and I continue to believe our execution capabilities are better than they've ever been. Our engineering capacity, the front end of it continues to get better as we become more ingrained with the client and can talk about all the risk, as long as we can control those risks, I think okay, we love it. I've just seen like the farther, the more that we can take on and control our own destiny, our vertical supply chain that we've built, I think, certainly helps us as well in these environments. And so all those things matter to derisk company, and you have to look at it in a holistic manner in order to understand it.

And just one related question on the -- generally, you don't have any mega projects, except SunZia is kind of somewhat of a big project. Just how is that one going? And just how do you think about the ability to kind of replace that business as you execute on it?

Yes. We get a lot of questions about that. I'm not concerned at all. I think '25, '26, '27 are the magnitude of larger projects that you see in the queues in MISO, SPP, all of them, the West. I think there's more projects, $1 billion-plus projects than we've ever seen in our career exponentially. So if you believe all those move forward, which I do believe they will, will replace it fairly easily. And I'm not concerned with the top line growth. I will say, SunZia, the amount of wind and what we've done there and the stations as well as just how we've looked at it holistically with the client is somewhat proof-of-concept of what can be done. It can be done on data centers. They can be done across the board for us. When you start talking about data cities, things like that, gigs of power, and generation, and how you do that? And can you do that? Can someone do that in a holistic manner, I think we can. And we didn't build any of those synergies and we don't talk about them because I think we have to go out and prove that we can do this and do this in a way that's meaningful to the investor. And when we do one, I'll be the first one to jump up and down and say, hurrah we did it. But I'm confident in our ability and our capabilities to deliver those things on time, on budget.

Okay. Well, last one for me before we open it up. Just one thing on the utility capital. You didn't mention what you know maybe better than anybody is the kind of resiliency and system issues, obviously, you're part of implementing resiliency plans of different sorts and also dealing with the storms like we have now and managing that. So just be curious your perspectives on just what really works, what needs to be done to the utility systems to make them more resilient. You see, I'm sure utility is doing different things. Is there some perspective you have that what could make a real difference there? And how much more needs to be spent to make the grids more resilient?

Yes. It depends on the regionality of the utility too, I think you have to look at where they're located and also states, what the -- whether you look at environmental impact or what you're looking at. So what I will say is, for generations in the business and the utility business, I've never seen it like what I see today. And when I say that the amount of capital that can be spent that needs to be spent on the system is insurmountable in the trillions of dollars. And I can't even tell you how many trillions, I don't know. . But you're talking about doubling the size, the transmission system over time. I mean, whether it's 2040 or 2050, it needs to double where you can really, really shape cost and security and all the things of the nation that's needed is through transmission and building and bottlenecks and all kinds of different things that really, really make us more secure as a country as well as secure and moving generation. And your generation factors are tighter than they've ever been, maybe not ever. I don't know the history, but they're tighter for me as long as I've been in the career, I've just seen the capacity levels keep coming and sliding, you said 20% factors, you're down in the 10s and 5s in there, and I don't know. I don't like that. I just think we're too close to the edge, and we have to build more generation, and we have to get more transmission moving across regional authorities. And to -- but if you're a utility, you're seeing the EV penetration in the West significantly. About 70% of the EVs that are sold today are sold to the West that policy continues, and we believe that EV is going to continue to penetrate. You're going to see what's happening in California with the incremental capital that has to be spent on the systems, continue to go across on the distribution level. So it depends on where -- that's what I'm saying, it depends on where you're at, because you can defer some distribution spending if you're in other areas. But if you're in the West, the circuitry doesn't allow you to continue to add EV because EV is going to take up capacity. And so you've got to build substations, build circuits that are larger than they are today. And so all the circuitry has to move up, how fast? it depends on how fast we believe that penetration comes in. Then you have fire hardening, what you're going to do, and you have all the interconnections coming out of renewables coming to the West. So if you're in the West or -- but that factor is the same if you're in New Mexico, South -- North Louisiana with data centers coming in. I mean, the load and what you see coming at you just continues to come from electrification of North America. So I think you have to really plan and you have to make sure that you plan accordingly. And then as an industry, we've got to educate that there's an NPV to this and the total energy cost comes down at some point, it starts to go the other way. And I think that's the big thing in that we've got to, as an industry keeps saying it like yes, you have to spend this capital, but the returns are there long term. So that's my take on it.

Let's open up for questions from the audience, question here.

Two, please. First, is there any lull in your business with regard to development as clients wait out the election outcome. Number one. And then longer term, as you think about operating leverage, the company has garnered operating leverage in the past. I might argue that you've improved some businesses, different divisions over time, and that has given you a lot of your operating leverage. But starting from today, as you look forward the next 3, 5 years, do you still see operating leverage? Or should we expect the majority of earnings growth to come from revenue?

Yes. I'll take the first one. I think what we see with the election and all the things there, we're not really seeing kind of a lull at all. And normally, that would be the case to some degree. I think a lot of it has to do with the push on technology against sitting no matter what the election looks like. So that demand they have against they're already behind and so you can't sit and wait. Interest rate environment is going down in this market is the biggest impact to the bill to the rate payer. So when that goes down, if we continue to see interest rates go down, it will get more robust, quicker. It's already pretty robust, but you could see a more robust environment if you continue to see interest rates go down. I already think they're down a bit. So I'm not really seeing this big lull per se. You're seeing projects move in, some move out a little bit for different reasons. I do not think it's an election that's driving that. We're pretty agnostic to who is winning. I mean I think if you ask me, you didn't ask me, I'm going tell you. If it's a Democratic win, you're going to see it be more robust, probably but it's not to say you're not going to get growth either way because I just think there's too much both sides, too many red states that are in renewables, too many -- too much technology, a lot of noise in the system. Either way, it's robust, either your policy, just the way EPA and everything else is in the Democrat environment where you're building a new plant and only operating at 50%, it doesn't make much sense to me. So I think some of those things are like hard to get your head around. Then you can see that change a little bit. The amount of demand, you can't build them fast enough at this point. And the second one, operating leverage. The growth drives that a lot. I tend to be a person who thinks we have 10 verticals, and we ought to be on all of them right now. And so we'll have some capacity, but we can't get to, every day something new comes in, another vertical of growth and the way we look at it. So we are a little heavy at times. So I do think there's operating leverage we can get. I mean the country is extremely litigious right now for whatever reason. So your insurance rates are moving around on you pretty good. And it creates some issues within the company on that, but look, yes, I always think we can get operating leverage. We certainly are striving to do so. But I'll let Jayshree comment on the rest of it.

No, no. I mean that's right, thinking through like we've gotten when we'll continue to get operating leverage with our capital, we're -- that's been a big driver. Working capital continues to be a push as well. So you're seeing all that in the ROIC. We are, as Duke was saying, some growth has pressured a little bit on G&A leverage, but you're going to see that hopefully come through here because some of those strategic initiatives we've been pushing through, we've been -- we've incurred some costs as we're trying to learn through some of those and improve on those strategies. But those benefits should be coming in as well over the next couple of years. So short answer to your question is yes. We're going to -- I think we're going to see more operating leverage on different factors.

Other questions? Right upfront, right.

Can you talk a bit about how your growth plans have changed over the last 18 months or so just in terms of the build-out of the large data centers. I imagine the growth plans you had 18 months ago were probably stale relative to what they are today? That's the first question. The second is in regard to labor, any comments that you're seeing -- any comments on what you're seeing in terms of labor inflation and availability. And you've been, I think, pretty creative in the past about how you've sourced prospective employees, how you're thinking about that going forward would be great.

Yes. I'll go backwards. I think in general, that the labor growth as far as -- we've always been about 5%, 6% type escalations. And I think that's what we see today. I don't think, from my standpoint, we see any outward type labor issues. The data center piece, the low voltage piece I got my head around that. You could see our stuff there maybe. But I do believe the strategy we have with the colleges and the pre-apprentices and the things that we've done there, we can implement and create some better flexibility. The company is bigger. I think it allows us to do different things from a labor standpoint, the Cupertino probably couldn't do stand-alone. And so going back to that when you go back 18 months ago, you weren't thinking Cupertino is going to be acquired because it wasn't for sale. And so I think as these businesses -- one thing I've seen in family businesses, the third generation does not want to come into business, especially the larger ones, and every one of them are getting a little bigger. They're going more into real estate and fun things, I guess, from their standpoint. So they don't want to be in the business as much. So it's going to provide us opportunities to look at bigger businesses. Your ESOPs are struggling to -- so many people are retiring with the ESOPs, they either have to take huge debts. So you're seeing some ESOP type transactions or big partnership-type transactions happen within the business, I wouldn't have expected. I do think the verticals, when we look at the front end of the business, the engineering capacity, I always want to make sure that we have enough engineering capacity to meet the demand. So we certainly think that that's growth areas. And every day, we continue, someone in the door on how do we look at vertical supply chain and that creates a lot of opportunity for us as we've made the acquisition of Transformers. I think that has really gone well for us in that vertical supply chain and how we've taken that and used that to build, and we're not really a manufacturer, but we are, and we can create capacity in the transformer business. But if we're going to create capacity, we want to build it. We want to build what we're creating the capacity for. And I -- we're U.S.-based manufacturing. I think that's going to bode well and I'm not worried too much on the ports and things like that, one of the things that we're trying to accomplish. So it just gives us more verticals and more synergies across the business that we continue to outpay, get our growth out of -- and I -- honestly, I think that -- and '24 has been a hard year in many ways because it's getting ready for, what, '25, '26, '27, '28 and that the balance in the system before hyperscalers came in at the level they came in, in hundreds of gigs, it was pretty, you could see it, you could see a path. Like when that came in, it just disrupted like everyone's plans, capital plans, all kinds of plans. And as that happens with -- especially within the industries that we serve, any kind of imbalance like that creates noise in the system. So I think as that gets out into '25 and beyond, you're going to start to see growth and predictable growth for a long period of time, multi-verticals for us.

Somehow, we're already at the end of our time. Appreciate Duke, Jayshree. Thank you.

Thank you.

Great, Steve. Thanks for the interest.