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

Good question. Certainly, we pass through the -- we believe labor goes up about between 4% to 6% as we move forward, was 3% to 5%, probably 4% to 6% now. And we -- those are passed through to -- contractually through our -- if it's not contractually, then we have it in our multiyear bids. But the 4% to 6% inflationary piece of labor has been there. It's been there a long time. So that's always been a pass-through or we've adjusted our portfolio and bids for those labor impacts. On the data center business, on the inside electric piece of the business, it's certainly constrained more than our outside business. So we're also putting in training. We're also doing a lot of things with the Cupertino acquisition and that platform to enhance that labor force. And so, I think, you'll continue to see us anything we do that involves craft skill will be curriculum. We'll have college credits with that. We'll have a lot of different things where we're trying to enhance the workforces to build for the future.

Our next question comes from the line of Gus Richard with Northland Capital.

Electricity demand is exceeding supply growth and delivery growth. And is there some point in time where demand overwhelmed supply and their shortages? And what's the near-term next 2- or 3-year solution? Clearly, SMR is not the answer. And I was just wondering if you had any thoughts on that?

I mean, you're going to have to see batteries become longer duration, more batteries for the intermittency of renewables. Solar continues to get built. It's economical. Wind will be there. But gas has got to back it. You see all the gas generation that's coming online are anticipated to come online, I think better said. That's there as well. But we've always thought gas would be 20% of the business. I still believe -- generation fleet, and I still believe that's the case. Even at double growth, you'll still keep it up there just to keep the intermittency of the grid and to make sure that you can have that. The reserve margins, if you go across the country, we used to have a pretty nice reserve margin across the country. I believe most of that is replenished substantially. And you can't run the grid on the edge. So you've got to get the generation in and get it in quick, to get those reserves back up on anticipated demand. And that you can't build. So one of the two things, you're either going to constrain the grid, constrain the [ keys, ] because you can't build generation or you build generation. So I do believe gas is probably the most immediate thing that you'll see get built along with solar and wind as you see it today, but gas will certainly supplement more so than we've seen in the past.

Got it. That makes complete sense. And that feeds into the sort of the next question. Given the hurricanes and fires and whatnot, are you seeing an increase in demand for hardening services? Are the utilities starting to allocate more resources? And are you seeing that benefit?

Yes. I mean, I think, the grid hardening programs, both fire and storms are certainly there, we see it across the board where you have multiyear type programs against fire or grid hardening per se. So yes, I mean, we see it quite a bit continue -- it's early stages in many areas, but in other areas, Florida being one, you're in late stages or later stages. I won't say late stages, but mid to 3 quarters into something in most areas. So a lot of people started with transmission hardening and you're starting in distribution hardening and undergrounding in certain areas. So I think you're early stages of this, and you -- if you continue to see violent weather impacts and the demands from the client to have them up quicker, the only way you can get things up faster is you've got to harden the grid or underground it, one of the two. And so that pressure against the grids that are 50, 70 years old, you've got to do -- you've got to modernize the grid. And you're doing all this while demand is doubling. So it is something that everyone is looking at from a standpoint of what do you do first? And you've got to harden the grid while you meet demand. So it is something that is unique to the industry these days.

Our next question comes from the line of Chad Dillard with Bernstein.

So my question is on the MSA renewal process. And I know that this is an ongoing process for you guys year in, year out. But just curious how much of the business is up for renewal over the next 12 months? And then, I think these contracts are 3 to 4 years in duration. So I'd love to get a sense for, like, how those conversations and how the contracts have changed versus 3 to 4 years ago from like a terms perspective? If you can talk pricing, anything like that would be very helpful.

Yes. I mean, MSAs are really framework for unseen work in many ways and it allows contractual terms to be done and resources to be allocated. I would say, as it stands today, it's much more collaborative because you can see the business longer, so can our clients. When you can see capital out and plan and prepare, it's certainly more efficient and more prudent to get out in front of it. So have the labor there, the labor shortages don't show up if you talk long term. So I think they're longer in nature, they're bigger. As we see it, they -- I can't tell you how many are up. We have, I don't know, hundreds, maybe thousands of MSAs, maybe 10,000, I don't know. A lot of MSAs that go around. We've worked off of them for 50 years. So it's very, very difficult for me to -- I mean, one client could have 50 MSAs. So it's just -- it's extremely difficult for me to give you those numbers. But what I would say is the base business is 85% today, and that's those MSAs typically around that for the most part. And as we see it going forward, it will be 85% as the business grows on the top line. You'll still see it at 85%. So as the business has grown, the MSAs and our ability to bid or negotiate or collaborate with the client to continue that, the stickiness of that and supplement their current workforces is there and will continue to be there going forward.

That's helpful. Second question is on Cupertino and labor availability. So I'd love to get a better sense for how you plan to integrate that segment with your labor training program. Just trying to figure out like just how much labor that can unlock over the next couple of years? And how fast you can scale the business? And if you can, just how much in terms of headcount is Cupertino?

Yes. I think, Cupertino, when you look at the workforce and how it's trained, I mean, they've got very good training programs, 3-, 4-year training programs, I believe. So very, very good. When we look at it, can we supplement it? Yes. I think, what we can do is early on our recruiting process is the way we get people into the trade, some people can't climb. Some people don't want to climb, so we can move people over into that segment. And it's just -- it will be synergistic for us as well. Some won't want to stay on the ground, they want to climb. So both sides of that continue, and we're always around the edges of each other. Craft is very similar. And the way they think, the way we think the company sits on top of us nicely. And so when you look at that, it just -- it bodes well for us to recruit very, very -- what I consider the top talent out there. They were premier solution provider for the data center business for a long period of time since inception. They have capabilities across the board beyond data centers that we like a lot, both solar and wind. It's a different labor pool, but they're exceptional in what they do. So we're excited about supplementing the curriculum, supplementing the onboarding, the -- what I would consider pre-apprenticeship programs that we have where people are smarter and faster and more productive when they get in. So all those things will certainly benefit both us and Cupertino going forward. The count, it's between 4,000 and 6,000 somewhere in there. It varies depending on where they are.

Our next question comes from the line of Drew Chamberlain with JPMorgan.

Just the first one on the renewable side, some positive commentary in the prepared materials on bidding activity and what you're hearing from your customers. But obviously, bookings throughout the first part of the year or first 3 quarters have been a little lighter than last year. And just kind of want to hear your thoughts on maybe what's holding up some of this from converting into backlog? And maybe what are some of the headwinds and stuff that you're hearing from your customers maybe on the election, IRA and when this can really convert?

I mean, I expect us to -- between now and the next time we get on a call, a substantial amount of LNTPs going into contract. The negotiations are robust and I'm not sure exactly -- I can't put a finger on why the backlog has not increased more there based on what the conversations are. It's just pin to paper in many ways and from LNTP to final FID. So I'm not concerned. The inbounds are as good as they've ever been in the negotiation of verbals, all the things that we're discussing on the renewables segment. I feel confident that going into next year, the backlog will grow, and it will look different the next time we have this discussion. So that piece of the business, not concerned with on the backlog side of it. So we see the market continuing to progress forward, the solar business, the wind business, even repower business, batteries are growing our fastest-growing piece. But we like it all. We see it. It's coming our way. And I think the election, yes, it could have a little bit delay. But the feedback we're getting from the client is either a Harris or a Trump win, you're going to have some noise in one or the other, but the business itself and the underlying business continues forward, and I believe our customers would say the same thing.

Okay. Great. And then, just on the data center side, you updated the market forecast that you used in the deck, calling for a 23% CAGR versus I think it was a 15% prior. Kind of just what's changed quarter-over-quarter? Have conversations started to look materially different? And do you think that this higher growth rate is indicative of what your business is going to do and what your internal expectations are over the course of the decade?

Yes. Just as a reminder, those are third-party reports that we're putting in there. And I think what it does is just reflects the continuing optimism of how much data center growth is out there as well as the power needs for enabling that data center growth. That's really what we were trying to show in that graph. But from our customer standpoint, I can have Duke talk about that.

Yes. I mean, I think that the graphs are certainly indicative of what we see in the business. And when you think about the growth and what we've done, yes, some of it's inorganic, but you also need to look at if we've done it consistently over the last 7, 8 years, we'll continue to do that going forward. And I do think the growth of the business at the midpoint staying under 2 of leverage, you can see it going forward. And it's basically the strategies of the company that put us in the data center business, that put us in the renewable business going forward. And when you think about the nexus of it, it all comes together. And the need for power out of data center is substantial. Can we be a solution to all the things? Yes. Are we in the middle of the discussions on all things data? Yes. Are we in the middle of the discussion on all things power? Yes. So it allows us a unique position to help and collaborate with multi-customers. And I just think it's from east to west, and it's a lot of opportunities and the company is pretty excited about what we can do with the growth platform that we've built and the TAM that's around it. The addressable markets are much bigger than they were yesterday. So I like where we sit, and I like our customer base.

Our next question comes from the line of Brian Brophy with Stifel.

I wanted to ask one on cash flow. So implied free cash flow conversion versus EBITDA for this year is now about 60%, excluding that Canadian transmission collection, which is obviously a little bit higher than some of your longer-term targets that are out there. Is there anything in free cash flow this year that's more onetime in nature? Or is this a good way to think about core free cash flow conversion going forward?

Yes. I think, we are very pleased with where we sit with our free cash flow. We have -- it's a reflection of several things. One, of course, is the mix of work, the renewable business and the way those contracts are structured, continue to be very working capital accretive. And so you're seeing the benefit of that in our free cash flow guide. We are doing better at our collections. Our DSO is improving. So those things are all factored into our free cash flow guide for the year. I will say going forward, we've said our expectations -- the right way to look at it is around a 45% to 55% conversion rate. With Cupertino now, we do believe we have opportunities to be on the high end of that range and even greater as we've seen this year. But it really depends on the mix of work. And so we have a big storm like we had this year -- this quarter -- last quarter, that can be a drag on free cash flow depending on the mix of the MSA work and how that comes into play, that can also be a drag on working capital. So I think the right way to look at it, Brian, is to continue to be in that 45% to 55% range with very good opportunities to be in the high end of that range.

Yes. And I'll add. The impact of Canada is certainly in the numbers. We don't expect to collect that this year. So that is certainly pressing on the number. That said, we did get some of the money in. We like the way the negotiations are going. Nothing wrong. We're highly confident in the claim. We're highly confident in what we've done from a construction standpoint. It's just taking longer to get end of the paper in Canada to receive our money. And so I do believe, you'll see it in next year. We're not going to press the business to tell you exactly when because I think it's more important to get the right answer for what we deserve and what we've done and so does the client. So we're just working with them to get the collections, but nothing wrong with the collections. It's taking a little longer.

Our next question comes from the line of Andy Kaplowitz with Citi.

Duke, I know one of the questions you get occasionally is that as SunZia ramps down in '26, given the size of the project that it would be tough to fill. We all know there's so much more to Quanta than just large electrical transmission projects. But how do you see that environment? Do you see sort of a new wave of large projects that could come out in '25 and '26? Or how do you think about that?

Yes. I mean, we see multi projects and whether they're $1 billion or $2 billion or $500 million, they're there. We're probably in -- I will say it again, the inbound and the negotiations of verbals what you build discussions are substantial. And I was somewhere the other day, and I was listening to -- I came -- one of the bigger manufacturers, Siemens Hitachi, one of them, I can't remember which one it was, talking about transformers and they said, "Hey, we can get there by 2030." If we said that today on the work that we did, we will get you by 2030. I would just tell you like it's not -- that's not in our DNA. And that demand is the same for us. The demand for larger projects that are out there has never been greater. And we see it to the West, to the East, you can look at MISO, you can look at SPP, you can look at ERCOT, you can look at the 765 build. You can look at anything you want developers just pick something and pick a geography within the country and see if you don't see large transmission, there is just as big as projects if you add them together or you take one, you take three, we're not concerned with our ability to look at large construction. I do believe you'll see the stacking effect of the business going forward, and we see it in '26, we see it in '27, we see it in '28, '29. We see the same thing they see.

So to that point, Duke, I mean, there's always going to be a little bit of noise. But at the Investor Day that you had a couple of years ago, I mean, you talked about sort of this upside case of 15% plus EPS growth. That would get you with capital deployment to $11 to $12 in '26. I'm sure you don't want to give us guidance in '26. But at the same time, does it feel like you're absolutely tracking to that upside case given what you guys have done with Cupertino and Blattner and then the markets themselves?

I mean, I said just a minute ago, next year, if we grow double-digit EPS, if it's 15%, we certainly have the opportunity for 15% and beyond. We've grown 20% this year at the midpoint, deploying capital. So we see our ability to deploy capital continues. We believe we'll be in -- some part of the range will be in double digits in '25. So if it's in '25 and we're going to grow the bottom 10%, that gets you to $11 in '26, if you just do the math. And look, that's easy to say it comes out real quick, but we've got to get and deliver it and execute on it, which I don't think we're a story about tomorrow. We're doing it today. And I think we'll do it in '25. I think, we'll do it in '26. We certainly have the opportunity in the markets are there.

Our next question comes from the line of Michael Dudas with Vertical Research.

Maybe following along on allocation and capital. Given the extraordinary demand and the excitement that's within the vendors serving the electric utility and development industry, when you're talking to the various companies that you're looking to maybe bring on board in the next couple of years to solidify your long-term plans, are -- is the industry going to need -- it seems like there's going to be a lot more scale and consolidation needed and are potential sellers of their businesses kind of looking towards that to kind of get to the next level of their growth and that provides opportunities for you guys to kind of get into the areas to maybe even especially maybe on the front-end engineering kind of work, because it seems like the customer base is wanting a lot more of that from you given the collaboration you've been talking about?

I mean, certainly, the front side of the business, as we call it, the engineering, the permitting, all those things are a big part of the business, and we need to look at those things to add to our strategies, and that's been known for a long time. We're disciplined about how we acquire and we'll grow it organically. We'll grow it somehow some way. If we have to partner, if we can acquire, we'll acquire. We're not going to acquire at any cost. We've said that before. We are disciplined to it, and we'll stay disciplined to it. So we see that. We see long term -- if you look at the transformer business we acquired, it's a 100-year-old business, a family business. It wasn't for sale. And I think when you think about it, people are -- they want these big long-term businesses. They want stability in their companies. They want to perpetuate the name. They see what we do. They see how we take care of people. They see the culture that we have here, and we're very selective. And when we look at it, I mean, Cupertino is a great example of a multi-decade relationship that generationally, we can provide great things for their people, great things for the management team, great things for the family. And they keep the culture that they've had yesterday, and the name is still on the truck today, and it will be in a decade from now. So, I think, that's the key to it, is just continue to create the culture that we have here. People generationally, I'm not sure why craft and the perpetuation when you get down, a lot of people that have businesses that are large in nature that provide craft skills, the kids want to go build -- they want to go build apartments and real estate or other things. They don't really like the businesses that their families have or they're not interested in craft and things like that, which is fine. It's great. So they want -- they're looking for stability for the people. And I think that's the key for us is to find those businesses and attract them and continue to execute on the culture that's here and protected and move forward with it, while we're creating what I would consider great returns for our investors and stakeholders.

Our next question comes from the line of Sangita Jain with KeyBanc Capital Markets.

So Duke, the DOE just recently signed on to become an anchor tenant on a handful of transmission projects. Can you tell us what you think that means? Does that bring them to the front of the line? And are you already talking to some of them?

Yes. I mean, we talked to the DOE. We talked to the people that are anchor tenants quite a bit. You still have got permitting and you still have -- some of them have transformers, some of them don't. I do think it helps, but in reality, your utilities, your IOUs that are sitting right there, if it's not an IOU, which some of them are, it's -- I'll just say it has inherent risk and more difficult. It's not that it won't happen. It's just harder. And I do think the projects that you see the DOE back are good. I mean, they're great projects, and we're all around them. And we like that anchor tenant. It's a great concept. I think, when you look at Texas, with the Texas fund and the things that are happening there, same thing. But a lot of the states and the permitting in the states and the PUCs and things like that, it's really about a rate payer discussion. Are we putting pressure on rates at the rate payer level. And when you look at it, T&D is not the biggest piece of a rate. And so we've got to do a better job of how we discuss that to the rate payers because gas, interest, a lot of different things are way more impactful than building T&D infrastructure. Actually, T&D infrastructure makes rates go down through congestion and things like that in most cases. So I think all those things that you have to look at, if you can prove those things out, the projects go much faster.

Got it. So that's very helpful. And on that, can I also follow up with the recent transformer acquisition that you announced? And if that is a different type of transformer versus the PTT or I honestly, anything that you can tell us on that acquisition would be great.

Long discussions in the transformer acquisition on the one we just made as well is PTT. So we've been in discussions since pre-COVID on the transformer business. We like the business. It's supplemental. It's a little smaller than the class, the bigger class transformer that can be made in PTT, not to say that -- but the utilities they serve, the clients they serve and the areas are certainly there. We can cross-sell. They can sell internally. We're out into '27, '28, even into '29 with these factories. And so we just -- we've got to watch it. We got to understand the market and serve our internal customers as well. And we're in a very, very small percentage of manufacturing. And I think for us, it's really a backstop against -- if you get tariffs in China or in other places, transformers become difficult. And we have U.S.-based long-term transformers here. And it will allow us to move our current workforce and projects forward. And we're really derisking the business against those things as well as collaborating with the clients on U.S.-based manufacturing. And that's the key for us, is to continue down the path and critical path items that we believe are risk to the supply chain.

Our next question comes from the line of Marc Bianchi with TD Cowen.

I guess this is a little bit of a follow-up to the prior question. There's been some concern expressed by renewable developers around labor and supply chain challenges being a bottleneck to their growth. I know, you just talked about the transformer thing a little bit, talked about labor earlier, but I think that was maybe more around kind of the T&D side of the business. But could you talk about what you're seeing on the ground like right now as it relates to some of these supply chain concerns? Is there anything that's maybe incrementally worse or better than it was last quarter?

I mean, you have to get into HVDC, certain kinds of HVDC, especially DC construction in your large stations to get like real bad. But besides that, I mean, ad transformers is certainly a constraint, breakers are certainly a constraint. But we've been able to -- we have a good robust. We see it. So I think, the things that we've done in our supply chain, we can help and enhance developers. Certainly, our partners and the ones we collaborate with, for sure, move projects forward. It's certainly something that the company has been able to do and collaborate with on clients. So we like our positioning there. I don't think it's gotten any worse. It hasn't gotten any better, though. You would think it would get better. It hasn't. And so it's just kind of stayed the same. Labor from our standpoint, I wish that manufacturing would get out of our capacity. I do. I don't believe I'll see it in my lifetime. But we've been able to outpace any kind of permitting bill, any kind of constraint. So if someone says come and build 1,000 miles of 500 kV tomorrow, I will tell you if they said it 3x over 5,000 miles, the answer is yes and yes and yes. We're ready.

We have reached the end of the question-and-answer session. I will now turn the floor back over to management for closing comments.

Yes. First of all, I want to thank the 62,000 men and women out in the field and the inclement weather and what they've done in these natural disasters. I would tell you they are first responders, they've seen a lot. The respect that they deserve is certainly something that we see every day, and I want to thank them. They've done a hell of a job and they're the best in the business. And I want to thank you all for participating on the conference call. We appreciate your questions and your ongoing interest in Quanta Services. Thank you. This concludes our call.

Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation, and have a wonderful day.