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

All right. Good evening, everyone. Thank you for joining us as we wrap up day 2 of Baird's Global Industrial Conference. My name is Justin Hauke. I'm the senior analyst covering specialty contractors, engineering construction facility services along with Andy Whitman. We're very pleased to have Quanta Services here. Name that we've covered for a very long time. And you guys, in a lot of ways, you've never changed, in a lot of ways, you've changed a whole lot, but we've got Duke Austin, the company's CEO; and Jayshree Desai, the company's CFO. I'm going to let Duke give us just 2, 3 minutes to lay out the land and then we'll go into Q&A. This is a big room. So if you do have a specific question that I don't otherwise get to session1@rwbaird.com, and we'll try to get you in. And then there is a breakout next door. Once we finish up here. So Duke, take your way.

Yes. Thanks for having us, and thanks for the interest. We don't take it for granted. So thank you for being here. We got to go last so, I guess, we're not waiting on lunch, anyway. So that's good. So Quanta, just for those of you not aware, we've built a company around craft skilled labor as a solution provider to energy infrastructure, infrastructure business that you see today, two large addressable markets, one of which is utilities, the other is it your large load customers technology. And each market is in the trillions on both sides of that. So I think it converges in the middle, we play a unique role, we self-perform about 85% of our business, 95,000 employees, $41 billion top line, growing nicely. We've really put the strategies in place, I believe, to capitalize on what we see as great markets for a long period of time. And lots of opportunity for us to expand markets. So look, we look forward to talking about it today, and thanks for having us.

Yes. So I mean we'll get to the election and just kind of lay the land on that. But maybe just big picture, I want to start with the fact that you guys had an Analyst Day back in March, you laid out targets, I guess, 7% to 10% organic growth and 15% to 20% EPS growth. Obviously, this first year has been way above that. I know Duke, you made some comments that we started off strong, we might have to look at those in the future. I'm not asking you to revise the 2030 targets. But maybe just to start with from a high level, what is moving better than expected. And it seems like the other thing probably maybe to emphasize more on that is the margins I feel like your commentary has been a little bit more positive on kind of structural margin potential that you guys have exhibited. So just maybe start there.

Yes. Look, I think at the Analyst Day. We did our best to lay out kind of a 5-year plan on 15 to 20 type adjusted EPS growth. And when we looked at it, I -- two addressable markets as I just said, and we walked through that. We're ahead, and I think by a considerable amount, we did say CAGR. It's not going to do many good on anything. I'll say because we're not going home and going to sleep. And basically, if you play that out, our CAGR, we could do probably not a lot, over the next 4 years and still be fine. But I do think like structurally where -- what we changed, I think the technology TAM, and how that came together, the strategy around it with the utility, went much faster than I thought it would. The demand is stronger like how -- we're short power in the country, much greater than I anticipated. The willingness to pay for power, the demand for AI is much bigger for compute, for cloud. And so when you have a supply and demand issue that's so imbalanced, it's going to create market expansion for us. We saw it. We continue to lean into it and expand it. I do think we're having a great year this year. We will grow next year. We've talked about in the upper side of that range and that we believe the opportunity to grow in the 20% range next year. And so we look at two years and you get a good look at it. I think there's opportunities to grow faster than that as well. And we continue to see the inbounds today across both segments that, from our standpoint, fit right down the middle of what we're trying to accomplish in the strategy. And we also leaned into the utility side of the business to take supply chain. We went vertical in our supply chain. We own transformer supply breakers, poles. We do a lot of things there. So that expanded nicely. And then we started our fossil generation business that has done very well, early, and I think that will do well late. So I like how we're stacking up, renewables did not fall off, Jayshree told me they were going to and they didn't. So like we're still doing well there and growing faster than we thought. But I would tell you it's broad-based growth faster than we thought, and the outward growth in the MEP business, it really has propelled the business in a much faster pace than we thought on Investor Day. And as far as margin expansion, we have a $20 billion kind of utility business that's regulated around regulated environments. That's not going to change. I think it grows just like it's been growing double digits at organic growth there and anything that we acquire loans into that. Our fossil generation business in the same, so it probably grows a little faster. And saying that, I just think that's kind of the platform that 10% to 12% is where we're going to be there. And then we are getting some leverage on training. And I think it's important to talk about because our training was around just certain classifications as we looked at craft and from [indiscernible] makers to plumbers to electricians -- inside electricians versus just lineman and other things that we were doing welders, things like that. It's allowed us to take someone from military that may not want to climb or anywhere, really, that may not want to climb, and they can be a plumber or pipe fitter, so we're getting a lot of leverage out of all of the curriculum and all the emphasis that we put on craft skill. And you can see it, I mean, we added 13,000 employees organically over a 6-month period, 9-month period. And we also acquired 12,000, so 26,000 employees, so pretty remarkable growth on the employee count. So that's got some help for expansion to leverage.

Yes. No, that was actually went right into my next question, which is, I mean, it seemed like that was another thing that was really apparent this last quarter, but really all year is that these new legs, I mean, you mentioned the concern about your renewables were going to fall off a cliff. And maybe you can talk about -- obviously, you have a data center exposure, but you have so many broad-based parts of it. But it just -- it feels like the company has moved to a position where -- you just had -- every single project is integrated in so many different ways that -- maybe that's what's different about Quanta today than someone was looking at it 10 years ago, it feels like.

I mean I think, look, we -- when we say solution provider, that's what that is, really it's moving across these segments. And that fungibility of labor that we have I mean, the more that we're concentrated in an area whether we're building power plants, solar, MEP, the electric side of a data center, electrician can move across the whole spectrum and never leave home. And so it's really, to me, it says a lot about how the company has expanded that solution to be much more than it was with the same craftsman sometimes with the same form and the same team, allow them to expand who they are up train in many ways. So that -- and it also gives us certainty and when we talk about where we're going, what happens if -- I mean, we're definitely like we get a question a day on there's no more data centers in 2028 peak and 2030 is done, like we're never going to build another one. Like we don't see that at all. We see long markets with our craft. And I do think, as we see that, we're also looking for other things that are coming in which AI is creating health care. I mean it's curing things. And so you're building Pfizer facilities, Lilly facilities all over the place, and that's what we do. I mean -- so it doesn't matter whether we're building a Lilly facility, or we're building a data center, the same electricians, and they can move. So I do think we've done a nice job there from that standpoint, which has allowed the company a lot of breadth.

I can kind of anticipate the answer based on that, but the question would be if -- what are the kind of key bottlenecks of what could happen that would change the growth trajectory? I mean maybe, for example, you've talked about there's these big 765 kV lines that could start next year. There's still some regulatory steps they have to go through. The data center work, you tend to be more later stage in them. So it's hard to see like that there would be cancellation risks. But just what are some of the puts and takes that would change the trajectory, maybe not even in '27 but in '28.

Yes. Look, I think it's some -- it would be a fundamental change with some political -- something extreme that we couldn't control, and you can't see it today. COVID, not in really slow us down, but like it just a little bit. So I think you could have some pause on something, but -- like everywhere we're started in the way that we're having conversations with our customers or we talk about compounding earnings. I mean our approach is, yes, if you need help in '27, '28, we want to talk about 2032. And those discussions are ongoing. And I think we're having great long -- we haven't started 765 at all in the field and probably won't until sometime next year. And when we do that, yes, look at compounds and stacks, but it doesn't mean that our underlying business that we're doing today is not growing double digits plus because I think you've got to look at that as well. We had none of that going on and the company is still growing at the rate it's growing at as well as like I'm still -- I look back, and I think about how much growth we've had internally. Organically, our electricians, we've moved people out of the industrial basin over into the -- our technology TAM and things like that, we've been, I think, taking create opportunities and really, really transferring that into EPS growth. And like if you look at the UI segment, you see the expansion civil capabilities on pipeline, moving over into other things. not just sitting on iron or anything like that. So look, getting utilizations out of all our people maximize what we can do and the solutions we can provide. Why you ask is we want more now yes, we can give you more now because we can move -- we can be extremely fungible. We have a scale of 95,000 people, and that allows us a lot of flexibility. But for that, we want longevity in the ability to compound earnings versus be very transactional, not transformational in the business and some one-off margin profile, it doesn't matter long term, and we got to get to think a bit larger, longer the way I see it.

Maybe one of the other things that seems that it's changed in the business is we've already talked -- craft is obviously the core of what you do. But you guys have made some really strategic investments. It feels like over the last several years in some of these manufacturing -- not from manufacturing stake, but as kind of a critical supply chain investment to that maybe it's derisked the way the business traditionally went to market. So is there more of that to come? Is that something where there's other areas that you think would be additive. And just how has that changed the way that you structure contracts now that you've got some of these like supply chain certainties?

Yes. Look, I think when we look at it, we want to keep our people busy. If we stop and start on things like it's just hard -- it's hard on our people. It's hard on us, more training, more cost. So when we started, transforms were short, especially domestic. So we leaned into transformers. We're now expanding that up to 765 kV. It's helped us a lot from a standpoint that I feel confident in our ability to go out and deliver a substation and transmission line. We do have some internal capabilities of 20% or so that we can move on to a project to make it go. And the pull-through is significant on those type of things, breakers were short, couldn't get breakers. So we formed -- we were building breakers and formed a JV with HiCo there on breakers. So meaningful to me to have that capability on breakers. In the quarter, we acquired a pole manufacturing business. Why are we acquiring pole because we're short on poles. We don't want to be Valmont, they do a great job. They're great partners in areas that we work with. But there's places that others couldn't supply. We were on there and we help both our end user out, which is our utility customers and keep our projects moving. For that, look, it's domestic. They want more, can we build it up, can we integrate it into these models. And I think we can, we are. We're absolutely integrating that supply chain and our delivery capabilities. We've leaned into it. We're the third or fourth largest buyer of high-voltage, medium-voltage equipment. So I think our ability to really flex that supply chain in the future is there. And we're continuing down a path. I mean, I still think it's pole by us transformers, whether we partner -- use our balance sheet to partner or build vertical we will. We're expanding every facility we have, I believe there. So that expansion is ongoing.

I mean it's really different because there's just not really another contract that's out there that has some this degree of kind of vertical integration. I mean you mentioned being a solutions provider, but it almost -- it feels like you've moved away from what people would think of an EPC where you bid a discrete project and these are more like programs that have many years involved behind it. And maybe that segues to another area that's newer is the gas generation stuff that you've been talking about and the partnership with NiSource. But in light of the potential for more regulatory push on data centers, I guess, more behind the meter work could be a potential, which obviously necessitates a lot of on-site generation work. So maybe just talk about your capabilities there, and how you get comfortable with the risk profile of building those plants?

Yes. So I think the company was asked to look at how do we build fossil generation, combined cycles, single cycles. We're pretty comfortable with single cycles, large frames are a little different, but it's okay. we can build them. I felt comfortable there. When we started talking combined cycles, we formed a joint venture and went to NiSource with it. They asked us to look at this. What I think is unique about it is we did derisk it to -- we got comfortable with our risk profile that we could operate at parity to the segment in which, call it, 10% to 12%. And as we went through it, we built the model with them. They talk to their customers on the backside of all the risk to go and build it. We're still performing the majority of the craft on the project. We needed some engineering, how so it was a single project, and we've done that. We've built a nice group in Alabama, and we had the capacity to do it. So we're in the business. And we listened to the customer. We're willing to work with them, but the risk profile, I've been around a long time. And like he can go off the rails in these things. And we don't want to do that. And so we've really told that to our clients and say, like, we're not going off the rails on these things. This is a risk profile we're willing to take, and this is how we can build it and the capacity that we have. And saying that, craft is short. Other things are short and our ability to self-perform Interfab acquisition was a really nice acquisition for us that did 50%, 60%, 70% of a power plant. And so like I just -- we continue to add to that, add to the front end part of the business. And on the backside, it's our job to derisk that into a profile that we can go and be consistent with the investor base. That business every day gets better and better for us. The inbounds get better, and we'll continue to stack that on. It won't start some in '27, but I think you'll see NiSource was a program, other customers have asked. So I think we'll continue to build that on out, and you'll see a nice platform company that is growing along with as all the generation assets, other engines come in, that will be us on the backside building large -- it won't be the biggest segment, but it will be a nice segment, yes, for us.

Maybe one other thing that's changed from the expansion of what you're doing and everything else, but it also feels like your free cash flow has become more predictable. And Jayshree you guys increased your guidance this last quarter. And maybe it feels like the MEP work is maybe additive to working capital, you more favorable cash advances and maybe less capital intensive. So I'm not asking you to increase -- your guidance this year is above your long-term target. But I mean how structural is that as a sustainable.

If the growth continues from our Renewables business and the MEP business and our EPC work, and it's sustainable. But these things, the growth rates make a difference because the working capital profiles around those -- that type of work is more favorable than our typical MSA work, where great customers were part of the system. But because we self-perform and we're on the system day to day, the working capital profile is just tougher. So it really depends on where that utility where growth is coming from, which will drive that. The other thing we're leaning into, as you guys talked about earlier, is our supply chain and our manufacturing expansion. And we started some of that this year, for sure. We are -- but we're also, as we mentioned, we're leaning into expanding our transformer facilities our breaker facilities with our HiCO partnership. You're going to see these things that can pressure free cash flow a bit. And we're also expanding our OSM capabilities, our off-site manufacturing capabilities as well. So over the next couple of years, that's why I still give you that range of 55% to 60%. But if the growth rate that we continue to see where it's coming from around these more favorable working profiles, yes, there's the ability to be on the high end of that range or even higher is definitely doable. But these things I just want -- I'm always, he teases me, but I am just very careful of explaining what can happen in our business in a good way. I mean it's all great. The utility business is growing faster, doesn't necessarily mean it's it's bad. It just means it's a different working capital profile, and we got to take that into account.

Yes. Well, in light of -- if it is, the better free cash flow for, and you do have that come in, I mean the balance sheet remains in a really good position. What is with all the uncertainty that's out there. I mean what is the best return on the incremental dollar invested? Is it in more of the supply chain stuff? I mean where do you want to be investing for the next couple of years that you're not already in today?