SOLV Energy, Inc. (MWH) Earnings Call Transcript & Summary

Good morning, and welcome to SOLV Energy's First Quarter Earnings Results Conference Call. Today's call is being recorded, and we have allocated 1 hour for prepared remarks and Q&A. At this time, I would like to turn the conference over to Anthony Rozmus, Investor Relations of SOLV Energy. Thank you, and you may begin.

Good morning, everyone, and thank you for joining us for SOLV Energy's First Quarter 2026 Earnings Conference Call. Before we begin, we would like to remind you that this conference call may include forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements, which are subject to various risks, uncertainties and assumptions could cause our actual results to differ materially from these statements. These risks, uncertainties and assumptions are detailed in this morning's press release as well as our filings with the SEC, which can be found on our website at investor.solvenergy.com. We undertake no obligation to revise or update any forward-looking statements or information, except as required by law. During our call today, we will also reference certain non-GAAP financial information. The presentation of this non-GAAP financial information is not intended to be considered in isolation or as a substitute for the financial information prepared and presented in accordance with GAAP. Reconciliations of GAAP to non-GAAP measures can be found in this morning's press release and in our SEC filings. Joining me on the call today is SOLV Energy's CEO, George Hershman; and CFO, Chad Plotkin. Following our prepared remarks, we'll open the call for your questions. As a reminder, there will be a replay of this call posted on the IR website. With that, I'll turn it over to George.

Thank you, Anthony. Good morning, everyone. We're excited to be here today to give an update on our first quarter performance. Before we begin, I'd like to officially welcome Mike Adams as Vice President of Investor Relations to the SOLV Energy team. Mike brings over 20 years' experience with a broad background spanning Investor Relations, capital markets and corporate finance. Mike is here with us this morning, and we are thrilled to have him on board. With that, let me begin with a few key highlights from the quarter. First, safety remains top of mind across the organization. We continue to perform well against industry benchmarks and our last 12 months' results through the first quarter reflect a strong and consistent safety culture across our field operations. Our focus on safety remains steadfast, and we will continue to work across the entire organization for continued improvement in this critical area. Turning to performance, in which Chad will provide more color. Our first quarter results reflect strong execution across the business with profitability coming in above expectations. From a market standpoint, conditions remain as constructive as we've outlined previously. We continue to see no change in the underlying outlook. Demand for power is accelerating. The need for new supply is clear and solar, batteries and battery storage remain among the most competitive solutions to meet that demand. Against that backdrop, we are executing on our growth strategy. We expanded the number of megawatts under O&M contracts during the quarter, further extending our long-term reocurring revenue base. We also announced the exciting acquisition of Roberson Waite Electric, which strengthens our capabilities in utility infrastructure and supports our continued expansion into the regulated market. That execution, combined with our differentiated value proposition continues to drive backlog momentum. We ended the quarter with approximately $8.2 billion of backlog, providing strong visibility into future revenue. And finally, given the strength of our first quarter results, the evolving business mix and additional projects reaching full notice to proceed, we are increasing our full year guidance for both adjusted gross profit and adjusted EBITDA. Overall, we believe the quarter underscores both the durability of the market and our continued ability to execute and capture that opportunity. As we turn to Slide 5, we will give a quick reminder of who we are. SOLV Energy is a leading provider of life cycle infrastructure services to the U.S. power sector with a strong position across utility-scale solar, storage, O&M and high-voltage infrastructure. What differentiates us is our life cycle model. We support assets from initial design to build through long-term operations and future repowering opportunities, looking out over a 35-year horizon. That integrated approach drives deeper customer relationships and more durable revenue streams. We build and operate at scale with over 21 gigawatts constructed to date and nearly 22 gigawatts under management. This is supported by a national footprint of a large experienced workforce. That scale gives us strong visibility into both market demand and customer needs. Importantly, our model combines EPC execution with a long duration O&M contracts, allowing us to extend the project into a reoccurring long-term revenue opportunity. Overall, our breadth of capabilities, execution track record and life cycle approach positions us well to capture continued growth as investment in power infrastructure and grid reliability remains a national priority. Moving to Slide 6. The demand backdrop for our business remains compelling and continues to strengthen. We're seeing a step change in the U.S. power demand with load expected to grow approximately 28% over the next decade, well above the roughly 5% growth seen over the prior decade. That acceleration is being driven by structural trends including AI infrastructure build-out and the reshoring of industrial manufacturing capacity. At the same time, the expectations are for over $500 billion of investment in solar and battery storage over the same period, translating to roughly 430 gigawatts of new capacity, about 3x the level of the prior decade. Battery storage, in particular, continues to scale rapidly with growth in the mid-20% range annually. Importantly, that build-out creates a long duration opportunity for our life cycle model. We expect operating solar capacity to more than triple over the next decade, and each gigawatt deployed represents decades of ongoing operations, maintenance, upgrades and repowering activity. Taken together, these dynamics reinforce our confidence in a long-term growth trajectory of the market and positions SOLV to participate across both the upfront build cycle and reoccurring life cycle opportunity that follows. Let's move to Slide 7 for a reminder of our growth strategy. Against the market demand backdrop, we have a clear and disciplined growth strategy. First, we continue focusing on the fastest-growing segment of the U.S. PV and storage market, projects above 200 megawatts where our scale matters most and is resulting in ongoing growth in our backlog. Second, we are expanding our O&M business to deepen our recurring revenue base with nearly 22 gigawatts under contract. Third, we are leveraging our capabilities to move into adjacent markets where we can add immediate value. Fourth, we are investing in innovation, digital tools, construction methods and predictive maintenance to accelerate growth and expand margins. And finally, strategic acquisitions that strengthen our capabilities and extend our reach will be important to our growth strategy. In fact, as we turn to the next page, we can see that following the end of first quarter, we announced a strategic acquisition of Roberson Waite Electric, which further advances our long-term positioning in utility infrastructure. Roberson Waite Electric is a California-based high-voltage and utility substation contractor founded in 1975, with deep, long-standing relationships across the major California utilities. The business brings an experienced workforce of approximately 100 employees and specialized capabilities in turnkey substation construction as well as battery energy storage system deployments. From a strategic standpoint, this transaction expands our utility infrastructure platform and accelerate entry into the regulated utility market, an area where we see sustained investment driven by grid modernization and resiliency priorities. Importantly, RWE adds differentiated substation capabilities across construction, testing and commissioning. This enhances our ability to offer a more complete life cycle-oriented solution alongside our existing solar, storage and high-voltage infrastructure services. We also see a strong cultural and operational fit. Their experienced team and established utility relationships are highly complementary to our platform and should provide incremental operating leverage as we scale these capabilities across the business. From a transaction perspective, total consideration is approximately $45 million, subject to customary closing adjustments and will be funded with cash on hand. We currently expect the transaction to close in the third quarter of 2026. Thank you, and now I'll turn the call over to Chad to provide a summary of our first quarter results and updated guidance.

Thank you, George, and good morning, everyone. Let's start on Slide 10. I'm pleased to report that our first quarter results reflect strong momentum across the business and demonstrate the continued execution capability of the SOLV team. First quarter revenue was $677 million, an increase of 66% year-over-year. This growth was primarily driven by significant new construction revenue as our strong and growing backlog continues to convert future results. On gross profit, please note that on a go-forward basis, due to the treatment of the allocation of noncash compensation and cost of revenue including that which relates to legacy awards, we will be presenting an adjusted gross profit and margin figure to appropriately communicate our profitability. On that point, adjusted gross profit for the quarter was $124 million, reflecting adjusted gross margin of 18.4%. This performance was driven by productivity gains from continued strong project execution, seasonally favorable weather conditions across several key regions and the recovery of reserves related to favorable settlements of outstanding change orders. Adjusted EBITDA for the first quarter was $93 million, representing an increase of 174% year-over-year. Adjusted EBITDA benefited from the favorable gross margin and reflects the increasing operating leverage in our business as we scale our revenue base. I do want to address the net loss of $27 million that you will see in our reported results. This was primarily due to a one-time noncash expense of $52 million from the modification of legacy equity awards associated with the reorganization in connection with our IPO. This is nonrecurring, noncash item and is not reflective of the underlying performance of the business. We have provided additional information around the composition of our GAAP SG&A in the appendix section of the presentation. Before we move on, I just want to thank the entire SOLV team. These results are a direct reflection of your hard work, discipline and commitment in the field and across the organization. Turning to the next slide to discuss our backlog. At the end of the first quarter, backlog stood at approximately $8.2 billion. This represents 82% growth over the last 12 months and a continuation of the sequential net growth in each quarter since year-end '24. This ongoing momentum underscores our commitment to excellence, the strength of our customer relationships and the compelling value proposition we offer as a full life cycle service provider. On our backlog, there are a couple of important points for consideration we'd like to remind you of. First, quarterly bookings and net backlog changes will not be linear and may be lumpy due to the nature of our sales cycle and the time lines involved in moving from LNTP to FNTP. Additionally, our reported backlog does not include verbal awards or other business development activity that has not yet been contracted or reached the LNTP stage. And on this point, the pipeline outlook for activity beyond what is reported remains robust. So with that, let's turn to Slide 12 for an update on our financial outlook. Today, I'm pleased to share that based on our strong first quarter performance, continued confidence in our outlook and execution capabilities of our teams, we are updating our full year 2026 financial guidance. Revenue guidance remains unchanged at $3.72 billion to $3.82 billion. We are updating our adjusted gross profit guidance to a range of $610 million to $650 million, which accounts for the adjustment related to the allocation of noncash comp expense. This reflects an updated gross margin expectation with a range of 16.4% to 17%. We are also increasing our adjusted EBITDA guidance to a range of $435 million to $455 million, up from our prior range of $400 million to $420 million. Lastly, we are making progress on our key financial goals and objectives. First, we expect to deliver on our financial targets and our first quarter results were an incredible start. Second, we are executing on accretive growth opportunities to expand our service offerings as evidenced by the Roberson Waite Electric acquisition. And third, we remain focused on driving ongoing professionalization as a public company with continued progress towards Sarbanes-Oxley compliance. And with that, I'll turn it back to George for closing remarks.

Thank you, Chad, and thank you all for joining us for our first quarter earnings call. For SOLV Energy, this reflects our continued progress as we build momentum and convert our strong foundations into results. We are pleased with our performance to date and energized by the opportunities ahead, including our continued focus on disciplined and strategic M&A to enhance our capability and support long-term growth. I will end today with where it all begins, our incredibly passionate and dedicated people. I'm humbled by their passion, expertise and consistent execution. They are committed to delivering value for all of our customers and stakeholders each and every day. With that, we are pleased to take your questions, and I will hand it back over to the operator. Thank you.

[Operator Instructions] The first question comes from the line of Mark Strouse with JPMorgan.

This is Michael Fairbanks on for Mark. Wondering if you guys could talk about the acquisition and just how it complements or adds to the existing capabilities from Spartan T&D? And then also, I would just be curious to hear how the acquisition factors into the guidance.

So I'll take that first. From a strategic point of view, RWE brings a lot of expertise in high voltage and substation work. So it's complementary to our Spartan acquisition, and that really focuses on transmission and distribution. And RWE's expertise is in the substation and high-voltage work itself and really brings a complementary expertise to our existing high-voltage services.

And then Michael, on your other question, just given the timing of the transaction and when we would expect to close. And obviously, just the relative size of the acquisition, I'd say that it certainly informed how we looked at it, but it's -- the dollar amounts are implicitly in the range more than anything else. So...

Great. And then maybe just as a follow-up. Backlog's grown for at least 5 consecutive quarters now. As you look at the pipeline, Chad, I think you mentioned continued strength, but anything you can say about visibility into continued growth in the backlog or anything you see here in the pipeline?

We are seeing continued growth in the pipeline and more opportunities that are converting throughout this quarter. And so I would see -- I would expect to see continued growth in our backlog.

Next question comes from the line of Julien Dumoulin-Smith with Jefferies.

Luke Fenker on for Julien. Really nicely done on the quarter. Margins clearly were the standout. I saw you noted change orders and favorable weather as drivers there, but can you help just parse out how much of the margin upside was in those items versus maybe structural bid margins on your contracts flowing through? And then separately, with the guide rate, should we think of this as like a new baseline for margins or more of a reflection of timing on those existing projects?

Yes, it's a good question. So maybe a couple of them. On the change order one, I would look at that impact. It's -- the way to think about it is these were prior reserves that ultimately for settlement reasons and stuff, I would look at that number sort of inside of the $10 million mark. I think on the rest of it, it's sort of a mixture of this process execution and on weather. I mean, as -- the way I would think about it is we all are aware of sort of the conditions across the country through the winter and the end of winter. And there's areas where -- such as like the Southwest part of the country, where it was incredibly dry, which allows our teams to be more productive. It helps reduce cost on sites because you've got less in things like general condition costs that are needed. I mean, not to get in the weeds, but a simple example is you don't have to bring on as much salt to help in icier conditions and stuff like that. So that certainly was really helpful overall. I think on your point on margins, look, we're going to report on overperformance. We don't forecast over performance. We see the opportunity, as we talked about in the past, to do really well on our projects. And then obviously, as we continue to expand the service business, that contribution is very accretive as we talked in the past, and we're optimistic about other parts of the business that we've acquired recently, where we'll see improved margin contribution as well coming out of those investments.

Awesome. Yes. And separately, we've seen some mixed project updates from maybe some of your solar E&C peers. Just curious on whether you're seeing anything similar across your portfolio, whether that's scheduling delays, cost pressure, maybe even tax equity issues at the counterparty level on any of your projects?

We aren't seeing any specific issues that you addressed. Obviously, across the entire business, we have pressures on pricing and schedule. I will just say that our teams continue to execute, and we are seeing the outperformance in a number of areas, reflecting in our results. But we obviously understand that is part of our business, and we have to build a robust infrastructure to be able to manage and mitigate those risks.

Next question comes from the line of Jon Windham with UBS.

Perfect. Congratulations on the result. I have sort of a big picture question. I'm just wondering if you're one of the larger EPC companies working on storage in the United States. There have been a number of announcements with auto OEMs, namely General Motors, Ford, SK and Honda and LG with their legacy Stellantis JV, converting battery factories in the United States from EV technologies to LFP for stationary storage. I'm just wondering if you've already started having conversations and how you would think about having the benefits of having more available batteries in the United States.

Yes. Thanks for the question. We think it's wonderful. It's a great tailwind for our business. And honestly, what the U.S. grid and infrastructure needs is a robust supply of batteries and energy storage. It only furthers the opportunities to place storage in urban grid locations, areas where it's hard to get transmission and continues to drive opportunities within our PV and storage business. So a robust supply chain is really a strong tailwind for our business.

Maybe just as a quick follow-up, just to be very specific. Are those players I mentioned, namely the large auto OEMs already in the market having conversations with SOLV?

So the majority of our projects, the IPPs bring the energy storage technology, but I know that those conversations are being had by our customers. And with our engineering teams, we are working with our customers to ensure that we can deliver a project with OEM technology from automakers.

Next question comes from the line of Philip Shen with ROTH Capital Partners.

Congrats on the great quarter. I wanted to check in with you guys on the permitting freeze. We wrote in mid-November last year that we could see some reprieve, and we got a bunch of projects unblocked and moving forward. But since then, my sense is things are slowing down. And so I was wondering how that plays out. I know, George, you talked about how you expect backlog to continue to grow. What are your thoughts on the outlook on this topic?

Thanks, Phil. Appreciate the question. Yes, as we spoke about in the past, we had some significant projects that had nexus to federal government permits at the end of the year. Those projects got approved and released one on BLM land and one with a federal interconnect requirement. Both of those are proceeding. Both of them are near gigawatt scale. So that was exciting. And our current backlog has limited to no exposure to federal permitting. And so we feel very strong on the projects currently in backlog and the pipeline, but it is something that we're watching, obviously, working closely with our industry partners and associations to work through any government freeze around permitting. It's a huge impediment to seeing these reaching the energy goals that we need to. And so we're working together on it. But we watch it very, very closely, right, so that we limit or minimize at all costs, our exposure to federal permitting on solar and storage projects.

Got it. Okay. And then shifting over to one of your points in your growth strategy. Number four was harness innovation to grow faster and increase margins. I was wondering if you could elaborate a little bit more on that, specifically as it relates to robots. And so what's your sense in terms of when you could start to deploy robots more in the field to make your labor even more efficient? And maybe it's more of a '27 time frame, but could we start to see gigawatts of installations in that time frame? And then what is the impact on margins? I mean, given the testing that you've done, if you've done any thus far, could we see hundreds of basis points of improvement from these robots that might be a kind of onetime upfront CapEx with, again, providing a lot of leverage for the existing highly trained labor force that you guys currently have?

Yes. We are using robotics today on a number of projects. So we're working with a number of the manufacturers of anything from factories out on site where they will pre-build rows and move them into locations as well as the module install robots that are in the market and autonomous pile driving. We're doing it all, working very closely with different manufacturers to see what best optimizes our workforce drive speed of installation. And so I would say that we're going to continue to do that. We have a large and robust innovation team and invest in that area to ensure that we can continue to deliver at the scale and demand that's necessary because we're being asked to build faster every day. And to do that, we need to use robotics, optimize our workforce, optimize how we handle logistics. All those things are in process and quite frankly, part of our execution strategy today and are driving strong results in a number of areas.

Next question comes from the line of Ben Kallo with Baird.