Quanta Services Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
August 4, 2022

There are 13 speakers on the call.

Operator

Greetings, and welcome to the Quanta Services Second Quarter 2022 Earnings Conference Call. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kipp Rupp, Vice President, Investor Thank you, Kipp.

Operator

You may begin.

Speaker 1

Thank you, and welcome, everyone, to the Quanta Services Q2 2022 earnings conference This morning, we issued a press release announcing our Q2 2022 results, which can be found in the Investor Relations section of our website at quantaservices.com, along with a summary of our 2022 outlook and commentary that we will discuss this morning. Additionally, we will use a slide presentation this morning to accompany our prepared remarks, which is viewable through the call's webcast and is also available on the Investor Relations section of the Quanta Services website. Please remember that information reported on this call speaks only as of today, August 4, 2022, and therefore, you're advised that Time sensitive information may no longer be accurate as of any replay of this call. This call will include forward looking statements intended to qualify under the Safe Harbor from liability established by the Private Securities Litigation Reform Act of 1995. These include all statements reflecting Quon's Forward looking statements involve certain risks, uncertainties and assumptions that are difficult to predict or beyond Quanta's control, and actual results may differ materially from those expressed or For additional information concerning some of these risks, uncertainties and assumptions, please refer to the cautionary language included in today's press release And the presentation, along with the company's periodic reports and other documents filed with the Securities and Exchange Commission, which are available on Quanta's or the SEC's website.

Speaker 1

You should not place undue reliance on forward looking statements and Quanta does not undertake any obligation to update such Statements disclaims any written or oral statements made by any third party regarding the subject matter of this call. Please also note that we will present certain historical and Forecasted non GAAP financial measures in today's call, including adjusted EPS, backlog, EBITDA and free cash flow. Reconciliations of these measures to their most directly comparable GAAP financial measures are included in our earnings release. You would like to be notified when Quanta publishes news releases and other information, please sign up for e mail alerts through the Investor Relations section of quantaservices.com. We also encourage investors and others interested in our company to follow Quanta IR and Quanta Services on the social media channels listed on our website.

Speaker 1

And lastly, one administrative note regarding today's call. Quanta's Chief Financial Officer, Jayshree Desai is recovering well from a planned, but slightly accelerated medical last week and will not be participating in today's conference call. Derek Jensen, Quanta's Executive Vice President of Business Operations and former CFO, We'll review and comment on the company's Q2 financial performance and full year guidance in her stead. With that, I would now like to turn the call over to Mr. Duke Austin, Quanta's President and CEO.

Speaker 1

Duke?

Speaker 2

Thanks, Kit. Good morning, everyone, and welcome to the Quanta Services' 2nd quarter 2022 Earnings Conference Call. On the call today, I will provide operational and strategic commentary and will then turn it over to Derek Jensen, who as Git said, He's making a curtain call appearance. Filling in for Jayshree today. He will provide a review of our Q2 results and full year 2022 financial expectations.

Speaker 2

Following Derek's comments, we welcome your questions. Our second quarter results continued our solid start to the year with record quarterly revenues exceeding $4,000,000,000 for the first time in our history, as well as record quarterly adjusted EBITDA and adjusted earnings per share. We also believe momentum is building for a continued profitable growth next year, and we continue to see opportunities for multi year expansion Our service lines driven by our collaborative solutions based approach, the growth of programmatic spending with existing and new customers and favorable megatrends. We are negotiating several large Master Service Agreement or MSA renewals with utilities Have significant levels of limited notices to proceed for projects across our segments and we are actively pursuing numerous larger transmission projects. As a result, we believe there is opportunity to achieve record backlog levels again in the coming quarters.

Speaker 2

Our Electric Power Infrastructure Solutions segment performed well overall during the quarter despite some supply chain challenges causing delays and resource utilization The impact on our business has been relatively limited and these challenges are not causing meaningful delays in our overall utility Capital Spending. We also believe these are shorter term conditions that have resulted in mostly short term delays and the timing of certain electric transmission work. And we continue to collaborate and partner with our customers to manage through these dynamics and work on potential mitigation solutions, which we believe will further enhance our relationships going forward. Demand for our services continue to be driven by broad based business strength from utility grid modernization and system hardening initiatives, as well as our reputation for solid and safe execution. Additionally, our communications operations continue to Well from both a revenue and margin perspective and remain on track for improved performance this year.

Speaker 2

Overall, Our electric power outlook remains strong, driven primarily by increasing service line opportunities and market share gains on our base business. Incrementally, we continue to actively pursue large utility programs that are designed to modernize the grid, support growing electric vehicle penetration and on other new technology adoption and hardened system to be more resilient to wildfire and severe weather events. To that end, in our earnings release this morning, we highlighted an MSA we secured in July to provide turnkey engineering, Instruction and program management solutions in support of the deployment of a national electric vehicle direct current fast charging network. This program brings together one of the largest auto manufacturers, North America's largest operator of travel centers and the nation's largest public fast These companies are collaborating on a fast charging network That is expected to include as many as 2,000 DC charging stalls at hundreds of travel locations across the United States. We expect to begin engineering work on this program this year, but construction expected to begin in 2023.

Speaker 2

This is just one example of several large electric vehicle charging deployment programs that we have been pursuing. Additionally, we believe the need to modernize and enhance the power grid to enable higher levels of load load and continuous power demand caused by Growing electric vehicle penetration will create significant opportunity for Pointer. Renewable developers and utilities are leading the effort to reduce carbon emissions, many with significant carbon reduction commitments Through aggressive efforts to expand our renewable generation portfolios, achieving their goals will also require substantial incremental investment And transmission and substation infrastructure to interconnect new renewable generation facilities to the power grid and to ensure greater reliability due to the significant increase of intermittent power added to the system. Over the near and longer term, we believe substantial load growth, Favorable public policy and overall positive sentiment supporting a greener environment will continue to drive North America's power generation mix Increasingly towards renewables. Our Renewable Energy Infrastructure Solutions segment performed well During the quarter and successfully managed through general supply chain challenges and solar project timing disruption caused by the Department of Commerce's Investigation into solar panel manufacturers in several Southeast Asian countries, the impact of which has since been mitigated through an executive order By President Biden.

Speaker 2

While the 1st 6 months of 2022 presented challenges to the renewable industry, we are on track and expect to build momentum through the rest of this year. Interestingly, due to the initial solar industry uncertainty and project delays caused by the Department of Commerce investigation. A number of renewable developers and utilities have been for projects in their wind portfolios to be built over the next several years. We believe this incremental wind activity could create a stacking effect in future years on top of existing industry expectations for accelerated solar and battery storage project investment. To that end, we're actively collaborating with existing and potential renewable generation customers on their multiyear programs, with some discussions and planning extending out to 2026.

Speaker 2

Additionally, we are pursuing several large high voltage electric transmission projects designed to support renewable generation and overall system reliability. And these projects have made meaningful progress with permitting and approvals. We are the leading high voltage electric transmission infrastructure solutions provider in North America and believe we are well positioned to be selected for these projects. As we have commented previously about both proposed and enacted Federal infrastructure legislation. Our positive multiyear outlook is not dependent on them.

Speaker 2

However, we view the current climate Related components of the proposed Inflation Reduction Act as incremental positive for the renewable industry. We believe the passage of these provisions Could accelerate renewable generation and related infrastructure investment over the coming years and provide Quanta with greater visibility into future opportunities for growth. We are particularly pleased with the performance of our underground utility and infrastructure solutions segment in the 2nd quarter. Our industrial services operations continue to execute very well and experienced strong demand as capital spending resumes and pent up activity From 2 years of deferred maintenance moves forward, we also continue to experience solid demand for our gas utility and pipeline integrity operations, which are executing well and driven by regulated spend to modernize systems, reduce methane emissions, ensure environmental compliance and improve safety and reliability. Looking to the coming years, we also continue to see emerging opportunities for Quanta's Underground Utility and Infrastructure Solutions Operations to play an evolving and increasing role with customers as they move forward with strategies to reduce their carbon footprint and diversify their operations and assets towards greener business opportunities.

Speaker 2

Quanta is successfully executing on our strategic initiatives To drive operational excellence, total cost solutions for our clients, profitable growth for the and value for our stakeholders, Our strategic initiatives are designed to uniquely position us not only to capitalize on the megatrends

Operator

of

Speaker 2

our end markets, but also enhance our customer relationships and market positioning. As a result, we are able to collaborate with our clients to execute their capital deployment plans, even during challenging conditions like the ones we face today, with supply chain inflation, COVID-nineteen, regulatory and economic uncertainties. These dynamics are not easy to navigate, but we expect to continue to successfully manage through them. We believe we have taken a prudent approach to our guidance for the remainder of the year to incorporate these factors. It is during these times that Quanta demonstrates its resilience, which we believe shows the strength of our operations portfolio and platform of solutions.

Speaker 2

As I hope you gather from my remarks this morning, demand for our services is robust across our portfolio and driven by long term visible and resilient megatrends. As a result of our solid first half financial results, greater visibility and continued overall favorable End market drivers, we remain confident in our 2022 consolidated financial expectations. More importantly, as we look to the medium and long term, We are incrementally more positive as energy transition and carbon reduction initiatives accelerate. We believe the infrastructure investment and renewable generation necessary to support these initiatives are still in the early stages of deployment. We have profitably grown the company and executed well in the past and expect to continue to do so.

Speaker 2

We are focused on operating the business for the long term and expect to continue to distinguish ourselves through safe execution and best in class build leadership. We will pursue opportunities to enhance Quanta's base business and leadership position in the industry and provide innovative solutions to our customers. We believe Quanta's diversity unique operating model and entrepreneurial mindset form the foundation that will allow us to continue to generate long term value for our stakeholders. I will now turn the call over to Derek Jensen for his review of our Q2 results and 2022 expectations. Derek?

Speaker 3

Thanks, Duke, and good morning, everyone. I'll start by saying that we've received so many phone calls and emails for an encore performance that I'm doing one more quarter call, But after this call, I'm dropping the mic. As Kit commented, Jayshree is doing fine and though she's not joining the call today, she has been overseeing the quarter and will be signing the She will be delivering next quarter's call notes as I wander around backstage. With that, I'll turn to our earnings release where today we announced record 2nd quarter revenues of $4,200,000,000 Net income attributable to common stock was $88,000,000 or $0.59 per diluted share And adjusted diluted earnings per share, a non GAAP measure, was a record for the Q2 at $1.54 Our electric power revenues were $2,200,000,000 a quarterly record and a 21% increase when compared to the Q2 of 2021. This increase was primarily due to growth in spending by our utility customers on grid modernization and hardening, resulting in increased demand for our electric power services, as well as approximately $80,000,000 in revenues attributable to acquired businesses.

Speaker 3

Electric segment operating income margins in 2Q20 or 10.6 percent compared to 11.4% in 2Q 2021. The margin reduction is largely attributable to normal project variability. However, margins were pressured somewhat by inefficiencies attributable to supply chain disruptions impacting certain operations and elevated consumables costs. Despite those headwinds, we were able to deliver double digit margins in line with our expectations for the quarter. Also included within our electric segment are our communications operations, which delivered improved sequential and quarter over quarter margins, putting us on page for upper single digit to double digit margins for the year.

Speaker 3

Renewable Energy Infrastructure segment revenues for 2Q 'twenty two $924,000,000 a substantial increase from 2Q 'twenty one, primarily due to $490,000,000 in revenues attributable to acquired businesses. Operating income margins in 2Q 'twenty two were 8.8%, comparable to the 9% in 2Q 'twenty one. Underground Utility and Infrastructure segment revenues were a record $1,100,000,000 for the quarter, 30% higher than 2Q 'twenty one, reflecting increased demand from our gas utility and industrial customers as well as an increased contribution from larger pipeline projects. Operating income margins for the segment were 8.1%, 5.30 basis points higher than 2Q 2021. The margins reflect strong performance across the segment, most notably by our industrial operations, which had record quarterly revenues.

Speaker 3

One below the item 1 below the line item I want to mention is our other income and expense. As I discussed last quarter, we hold a common equity interest in the fixed wireless broadband technology provider, Starry Group Holdings Inc. As required, we remeasured the fair value of this investment based The market price of the publicly traded company stock as of June 30, 2022, which resulted in the recognition of an unrealized loss of $41,700,000 during the quarter. While the unrealized loss is significant, we remain confident in the Starry business as well as our scalable wireless platform and see a bright future for the deployment of Starry's fixed wireless technology.

Speaker 2

And we are not alone

Speaker 3

in this assessment. As a point of reference, the analyst community has an average price target for Starry above $9 per share. Our total backlog was $19,900,000,000 a reduction of $600,000,000 compared to last quarter. The reduction is primarily attributable to our multiyear MSAs, which saw a reduction in estimated value due to 1 quarter's worth of backlog turning into recognized revenues during the Q2. Our 12 month backlog is a record $11,600,000,000 a slight increase compared to last quarter, indicating consistent levels of committed work over the near term.

Speaker 3

With the continued demand for our services and robust activity across all of our segments, We fully expect backlog to remain strong and to report new record levels of backlog in subsequent quarters. For the Q2 of 2022, we had free cash flow, a non GAAP measure, of $14,000,000 compared to $126,000,000 of free cash flow in 2Q Troy 1. Free cash flow for the quarter was below our expectations with the shortfall largely attributable to timing on certain renewable contract awards, which We typically have favorable cash terms and continued elevated working capital requirements associated with the large ongoing Canadian renewable transmission project driving an increase in contract assets, which we've discussed in prior quarters. Regarding the Canadian Renewable Transmission project, We continue to work with the customer to address the growing contract asset balance. Extensive schedule delays, primarily due to COVID restrictions and its impact on remote location project have extended production schedules through another build season.

Speaker 3

This and other factors have negatively impacted our ability to meet contractual billing milestones and have also increased costs as a direct result. Discussions are ongoing with the customer with the revised build schedule agreed to by both parties. We've engaged in discussions regarding adjusting billing milestones and remain confident in our cost position, but resolution of certain of these amounts will extend beyond this year and have impacted free cash flow and will continue to impact DSO in the near term. The estimated impact of these dynamics is currently increasing DSOs by as much as 5 to 6 days. On a positive note, another previously large Canadian electric transmission projects that dealt with similar challenges, received customer approval for a significant portion of the contract associated with change orders during the quarter.

Speaker 3

The approved amounts were billed during the quarter and we expect selection in 3Q 'twenty two with resolution of the smaller remaining balance expected by the end of the year. Day sales outstanding or DSO measured 81 days for the Q2 of 2022, a decrease of 2 days compared to the Q2 of 2021 and an increase of 1 day compared to year end. The decrease from 2Q 'twenty one was primarily due to the favorable impact of the acquisition of Plattner, which historically operates with a lower DSO than certain Our other larger operating companies. This positive impact was partially offset by the previously discussed working capital dynamics associated with the 2 large Canadian As of June 30, 2022, we had total liquidity of approximately $1,800,000,000 and a debt to EBITDA ratio of 2.4 as calculated under our credit agreement. We expect continued earnings growth and cash generation to support our ability to efficiently delever over the following quarters, while continuing to create stockholder value through our dividend and repurchase programs as well as strategic acquisitions.

Speaker 3

As of July 31, 2022, we've acquired approximately $104,000,000 worth of stock Since the beginning of

Speaker 2

the year as part of

Speaker 3

our repurchase program. And in July, we acquired a utility contract in the West that specializes in underground construction. Turning to our guidance. We had a solid first half of the year and we remain confident in our ability to deliver against The guidance we laid out on our last call, however, the composition of our earnings across our segments is slightly different than our initial expectations, which we believe reflects the benefit and strength of our portfolio of solutions. We continue to see strong demand for the services across our electric segment, We now expect revenues to range between $8,500,000,000 $8,600,000,000 a $200,000,000 increase from our previous range.

Speaker 3

However, as Duke commented, portions of our transmission operations are being negatively impacted by customer driven material delays and accordingly, We're moving labor and equipment to address our customers' growing distribution needs. This shuffling of resources is creating inefficiencies as we also grow headcount, which we expect will slightly pressure margins in the back half of the year. As a result, we now expect margins for the segment to range between 10.6 10.8%, still a double digit operating profile, but slightly below our previous expectations. Our Renewables segment was negatively impacted by the uncertainty on project timing attributable to potential supply chain disruptions. However, we've seen some improvement in that regard over the last month.

Speaker 3

We currently see the opportunity for the back half of the year to be stronger, with full year revenues now expected to range between $4,000,000,000 $4,200,000,000 A $200,000,000 increase from our previous range and operating margins continuing to range between 8.5% 9%. Our underground segment has had a great start to the year. Given the solid performance to date and improved visibility into the remainder of the year, we are tightening our full year range of expectations. We now expect full year revenues for the segment to range between $4,100,000,000 $4,200,000,000 with margins expected to range between 7% and 7.5%, which puts our previous midpoint expectation as the new low end of the margin range. With regard to free cash flow, we are lowering our full year primarily due to the Canadian transmission project dynamics we're working through, but also due to incremental revenue growth that will require additional working capital.

Speaker 3

Accordingly, we now expect free cash flow for the year to range between $550,000,000 $750,000,000 Due to the lower free cash flow coupled with increased interest rates on our variable rate debt, we now expect full year interest expense to range between $120,000,000 100 Are now expected to range between $3.32 $3.65 and full year adjusted diluted earnings per share attributable to common stock, A non GAAP financial measure to range between $6.10 $6.44 Additionally, We now expect adjusted EBITDA, a non GAAP measure, to range between $1,640,000,000 $1,710,000,000 for the year. For quarterly commentary and additional details on our financial expectations, please refer to our outlook summary, which can be found in the Financial Info section of our IR website atquantaservices.com. From a long term perspective, the tailwinds behind our end markets remain robust. We believe our industry leading solutions differentiate us from our peers and then present management with the opportunity to deliver significant stockholder value through organic growth and Strategic capital deployment through 2026 and beyond. I'll now turn it back over to our operator for Q and A.

Speaker 3

Operator?

Operator

Thank you. We will now be conducting a question and answer session. The confirmation tone will indicate that your line is in the question For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star key. In the interest of time, we ask the participants to limit themselves to one question and one follow-up and rejoin the queue for any additional questions. One moment please while we poll for questions.

Operator

Thank you. Our first question comes from Jamie Cook with Credit Suisse. Please proceed with your question.

Speaker 4

Hi, good morning and congrats on a nice quarter. I guess, Duke, my first question, The market has talked about and you sort of alluded to supply chain, labor, inflationary pressures. Can you talk to where that is Most pronounced sort of how you're managing through that and to what degree do you see that as a risk of project delays and or to your guidance? And then my second question, Derek, I guess I'll ask you because this will be the last time I get to ask you a question on a public call. Was pleasantly surprised by the underground margins in the quarter or so.

Speaker 4

Can You talked to how much of that was just the industrial business is picking up or is there anything structural going on there that you feel more confident that margins We're closer to getting your margins to your targeted range. Thank you.

Speaker 2

Yes. Thank you, Jamie. I think when we look at supply chain, as we're building crew counts and things of that nature, there is some small impacts on minor material throughout the utility system. And it does create some inefficiencies with our crews, especially when we're building. So those impacts coupled with Some inflationary pressures on consumables.

Speaker 2

It does pressure a bit. I do not think that's something that Given the guidance, we took all that into account. If it does levelize or if it does get better throughout the quarter, the end of the year, Certainly, it will move upwards. It's utilizations and the buildup for future years and working with the client in a collaborative manner, which is what the company has done in the past and will continue to do on a go forward basis, all for really the outer years. And I think It's really important for us to make sure that we're building these crews while working with the client on these minor material issues throughout the system.

Speaker 2

So we don't really see the impact. It's not the solar we talked extensively about that last quarter and worked through that and like I thought we would. So really nothing there To speak of, so all in all, really good from our standpoint. Macro markets are strong, not seeing large supply chain issues. And the ones that we are, I think it's opportunities for us to work with the client.

Speaker 2

And I'll just say a little bit on the margin and I'll give it to Derek. We've said all along that we view the company as a portfolio and that we've just doubledigit EBITDA, adjusted EBITDA margins And through the portfolio, and I think it's prevalent. It resonates. We continue to see the portfolio rise Throughout and it's really whether it's industrial Canada or whatever, the whole portfolio continues to move forward and upward. But I'll let Derek comment.

Speaker 3

Yes. I would say that unique to the quarter, there wasn't anything individual I'd call out. It was really kind of across the segment performance. Industrial led the way, Record revenues for them, solid margins, they're looking to be into a pre COVID type of performance levels for the rest of this year. So but the entire segment is seeing improvements, better utilizations, Good execution, utilizing some of those resources still yet on the Electric Power side as well as a reminder.

Speaker 3

And then it's all still yet towards our path of being able to Net group in that upper single digit profile and we're seeing that through this year and as we go forward.

Speaker 4

Okay. Congrats and Derek, I'm sure you'll miss these calls.

Speaker 3

Thanks.

Speaker 2

Thanks, Jim.

Operator

Thank you. Our next question is from Steven Fisher with UBS. Please proceed with your question. Thanks. Good morning.

Operator

Just looking at the decline in the backlogs here a little bit, just focusing on renewables. To what Stent, was that decline a function of some of the tariff dynamics in the quarter and the uncertainties that that brought with it? Because if that's the case, that's understandable. But I guess, what is your expectation or is it your expectation that that backlog in renewables will start growing again As soon as the Q3, I know you've got some limited notice to proceed, but should we expect that backlog to start growing again in the near term?

Speaker 2

Yes. Thanks, Steve. The renewable backlog, when we look at it and the amount of inbound calls, It's probably one of the most robust times that we've had at the company. From that standpoint, I believe the backlog will build substantially Throughout the year in the Renewables segment, timing, the LNTPs are really more so when you say limited notice to proceed, we need to not put those in backlog. And as that becomes contract, then we'll put them in.

Speaker 2

I just the amount of LNTPs to contract, that time has elongated a bit Due to cycles, just primarily around the solar impact as well as some of the wind portfolio moving up, I just we see that growing throughout the year, timing of which it could be the Q4, it could be the Q3, Maybe early next year, but again, we reiterated where we think the segment where we thought Flaggeden would be, and I continue to be more confident about Where is that Renewable segment going today than I've ever been?

Speaker 3

I'll add, really everything that Duke said. I'll add that we've always About how that thought can be lumpy for Quanta as a whole, I'll emphasize that in previous calls, we've commented that it could be more so in this renewable segment, right? It is There's an aggregate of project type dynamics that manage a little bit less base business component to it. So you might see a little bit more ups and downs at any given point in time and that doesn't necessarily indicate the trend. We continue to feel quite confident in the multiyear market.

Operator

Okay. Just a follow-up.

Speaker 2

Can you give us a sense of

Operator

the size of that EV charging MSA? And I think you have you mentioned a bunch of other MSAs you have in the works, how many of those are completely new types of arrangements versus renewals of what you already have? Thank you.

Speaker 2

Yes. Steve, it's meaningful. I would say it's more about for us When it's going to get started, how it's looking on a go forward basis, we're having the same discussions with multiple clients, multiple programs. But it's also the ancillary effect on the utility system, and I'll continue to say that, is more important of what happens To the system and really the utility spend against EV charging and what's necessary to make that work on a consistent Just day to day, it's substantial and it's substantially more than the EV charging network itself, but we are seeing those projects We have come to fruition here.

Operator

Thank you. Our next question is from Chad Dillard with Bernstein. Please proceed with your question.

Speaker 5

Hi, good morning guys.

Speaker 2

Good morning. Good morning.

Speaker 5

So I want to go back to your comment about electric power margins and bringing it down this quarter. So can you just break out the impacts from headcount, the customer driven material delays? And I think you mentioned Consumables. And then just like is there any opportunity to recover this? And just like how broad based are these issues in your portfolio?

Speaker 2

I don't think the issue is systemic. I don't think it's elongated. We're building crews. Normally, the company runs right through it. We did increase headcount around 1,000 in the quarter.

Speaker 2

It does create some pressure, the material modern material delays with that, with some inflationary pressure on consumables. Altogether, Look, it does impact us a little bit. I do not think it's we're going to work with our clients long term. We're a company that really collaborates. So I don't see us getting any recovery on it.

Speaker 2

We'll work through it. It will be a long term for us Over the next 10 years, the gains today for the next the future. So in my mind, A little bit of margin pressure, not bad. We'll work through it. I'm not also when we look outward Against what we've seen in the past, if you think about storm, our guidance is like $100,000,000 plus and last year, we did $400,000,000 in the last 2 quarters.

Speaker 2

So we're not baking any of that in. It will depend on utilization. And if we get prudent guidance, and I believe there's upside Essential to the backside given where we sit if we get supply chain coming through or any kind of major storm event.

Speaker 5

Got it. That's helpful. And then it's almost been a year since you've acquired Llan or at least announced the acquisition. So just curious to get some No update on progress on what you're seeing in terms of sell through from legacy Quanta customers into Blattner? And are you Seeing an uptick in regulated utilities appetite to shift their mix towards renewables?

Speaker 2

I think the business itself, We continue to be pleased with what we said. We're making good progress on synergies. We constantly are in contact with our clients about both When solar not only on utilities or developers, but also our UI segment, All of our customers are really looking towards a carbon free footprint. And when we think through it, we thought that we could sit at the tip of the There on energy transition, we think we're at the tip of the spear on energy transition with Lattner and certainly believe that every bit today as we did before

Operator

Our next question is from Justin Hauke with Baird. Please proceed with your questions.

Speaker 6

Hi, good morning guys and good morning, Derek. I guess last time we'll talk this way on these calls. But I guess I had a question on the guidance with the upside from the JV contribution from Luma. I guess, it implies the base segment margins are a little bit lower, but I was more interested in Kind of where the upside is coming from that, I know there was opportunity for earn outs and some additional project pickups. So I'm wondering if it's from that or Was this the base contract expanded and there still is more opportunity from those other items?

Speaker 3

Yes, it's really the latter. A lot of it was So share with us basically some carry through some cost management side of the equation on activities that we're doing. As of yet, we haven't started Anything for the new project type dynamics, which would be incremental to the base project, those things are still yet to come. They're imminent. But right now, the differential this quarter is basically kind of cumulative cost management type dynamics.

Speaker 3

And looking forward, you can see that we're still Forecasting the contribution to be comparable to our previous forecast levels for the 3rd and the 4th quarter.

Speaker 2

Yes. I do think we're seeing some payment funding coming through down on the island, and I do think there'll be opportunities for us in 2023 to actually Form some construction that's outside the contract.

Speaker 3

Another thing of it, I'd explain up there is that, that line item has multiple joint ventures, Not just the Luma joint venture. So we had a few joint ventures that actually executed quite well during the quarter. So not all of that variance is unique to Luma.

Speaker 6

Okay. Thank you for that. And I guess my second question is just going back to Blattner again. So the revenue contribution for the segment at least from M and A, $490,000,000 that's kind of comparable to what it was in 1Q. I guess we I thought there would have been maybe a little bit more tick up.

Speaker 6

You guys have been pretty upfront about the challenges from the tariffs the renewables business here in the first half, but I'm just curious with your outlook for that business, are you still thinking $2,500,000,000 of revenue contribution Or is that a little bit different this year than maybe what was originally claimed?

Speaker 2

No. We reiterated Our guidance on the acquisition as well as the segment. So obviously, I mean, I think in my mind, It's every bit as good as what we have said. And I think the longer term, even 'twenty three, The build in 'twenty three and beyond is greater than we thought.

Operator

Thank you. Our next question is from Noelle Dilts with Stifel. Please proceed with your question.

Speaker 7

Hi, guys. Thanks for taking my question. So I wanted to dig into the cost side a little bit more just because I think it's been Tough. From a cost perspective, kind of across the industry, you've discussed before that fuels a relatively small percentage of your total cost, I I think at about 2%. Could you speak to how you've dealt with fuel cost increases in the quarter and the extent to which you've been able to pass them on Customers, and also sort of with labor and equipment and components, have there been have you been able to pass that through reasonably well or have there been Instances where you've had to go back to the customer and get some relief, I'm just kind of curious, what the process has been like for some of those challenges in the quarter?

Speaker 2

Thanks, Noah. The costs certainly have increased, but typically, we're able to work through those, through scale, through work collaborating with the client. We are building crews, and I do think the build is really what's causing most Our issues as well as the inefficiencies of the supply chain is not necessarily the fuel or the inflation. We can usually work through those kind of pressures And we work with the client on that. And I do think it's just the culmination of all 3 kind of in a quarter, you see a little bit of pressure.

Speaker 2

Actually, internally, we're on kind of where we thought we would be from a margin standpoint. It's the guide going forward that we've pruned on. And I believe, in my mind, This pressure the overall segment margins, not where we sit in the 1st 6 months. Can we operate through that in the latter half? Maybe.

Speaker 2

We'll certainly take a prudent approach to guidance. We thought we should at least acknowledge that there is some pressure, but we're not seeing the pressure that and We're not going to talk about fuel and crew counts and those things on a daily basis. We can work through those through on the way that we Good cost recovery as well as get more efficient as a company and scale.

Speaker 7

Okay. And then in the past, we've talked about How to think about labor costs given that you're union and you typically have some visibility as it relates to the electric Workforce, any updated thoughts on how we should think about coming Labor cost increases and what the conversations with the unions are like and generally how to think about overall what that looks like as we're kind of ending this year and heading into 'twenty

Speaker 2

No, I think when you look at the company, that's our core is cost of labor and our ability to work with Unions as well as all of our trade associations, I think, are really important. And the way that we've set our call to the way that we've done our training for the last 6, 7 years, the amount that we've put into this, in my mind, We're really helping and collaborating with the client and talking through any kind of escalations in the future. We've worked really nicely to We're going to collaborate on these things, even the inflationary bill that has some of the language in it. We've worked through all that. We sit in a really good position there, Noah, and I think we've got those covered going forward.

Operator

Thank you. Our next question is from Michael Davis With Vertical Research, please proceed with your question.

Speaker 8

Good morning, gentlemen.

Speaker 2

Good morning.

Speaker 8

Du, can you maybe share some thoughts on The opportunities that you're seeing, I'm sure they're quite broad on the high voltage transmission projects, the larger ones. And given your where your base business is, how selective do you plan on being? What kind of room do you think you have on the EP side For those types of projects, so then even on the pipeline side, there's been quite a bit of news lately from Washington about certain pipelines and certain opportunities and change And some regulatory aspects, just share your appetite on both sides, has it changed much in the last 6 to 12 months Or given the cash flow issues, I'd say, maybe seeing out of Canada, how selective you might be given the base business seem to be doing quite well?

Speaker 2

Now when we look at the large transmission and certainly it's a robust environment, we're talking a lot. I do think the states have a lot of say Even if FERC has good visibility and there is a large number of projects to get stated, it's still Tough on those big projects. But that said, we are in the middle of quite a few, More so now than in the past. So we are looking at a lot of bigger products. I wouldn't say we're around the edges on them all, try to collaborate with the client on Certainly, for us, it's about planning and helping upfront.

Speaker 2

So we have a success In the future, and I think that's our job is to work with the client to be successful on these larger projects. Canada, it's always We've been through 5 or 6 projects, takes a little bit to get cash. We always work through those with the client. We've worked through one successfully in the quarter. We'll work through the This other one, the remaining of this year and the next.

Speaker 2

But we are executing well. We are known for Northern Clines. Our People in the field are world class and that project is remarkable what we've done through COVID. So I'm highly confident where we sit there and then our Collectibility there as well as getting our cash flow a little better than it is today. Canada was certainly impacted more so than the Lower 48 when you look at COVID and things of that nature, especially with 12 camps on a job.

Speaker 2

So, look, I think Both Canada from the PIPE side, even some in the Lower forty eight, there is some projects moving around, But our base business is robust. Those are all really additive in our thinking to the future versus This is where we sit. Anything there would be additive the way I see it. We're really not going to chase shiny objects. We're really working on our base business and as the shiny objects happen to come in, it will only increase our guidance going forward.

Speaker 2

Thanks, Stu.

Operator

Thank you. Our next question is from Adam Thalhimer with Thompson Davis. Please proceed with your question. Hey, good morning guys. Nice quarter.

Operator

Hey, first question, I wanted to ask about Your MSAs, did those have inflation protections baked into them coming into this year or is that something you need to work on as you renegotiate those going forward.

Speaker 2

They're all different, but I would say we typically have some escalations, labor escalations for sure, which is typically around 60%, 70% of the project. So normally, that's in there And some of the consumables would be in there. Again, fuel is about 2% of cost. And so It's really the build up, your training, all the things that are necessary to put new people in the field, which we've done a nice job through the colleges and the pre apprentices. But that coupled with some of the inflationary pressures certainly in the quarter, I would say, we just took a prudent approach in the future On guidance, we're really on target the way I see it for the quarter.

Operator

I agree. Okay. And then I wanted to ask about the EV charging opportunity. Is the big opportunity for Quanta, is it actually installing the bay or is there substation

Speaker 2

I think it's both. But what I would tell you is it's 100 times more meaningful on the backside than it is on the station itself or the bay itself. And the reason Is the load is at really at the distribution level, particularly. And so as that happens, To get the load to the distribution level, it's substantial both in from a generation standpoint through the sub down through into the distribution side of the business. It's like big I don't know how to explain it, big pipe going into a little pipe that doesn't have any room.

Speaker 2

So you need bigger pipe all the way through. So In my mind, it's just a lot on the system. It needs to be modernized, and we're in the early stages of starting that distribution bill across North America.

Operator

Thank you. Our next question is from Alex Rygiel with B. Riley. Please proceed with your question. Thank you.

Operator

Duke, you've been through many different economic cycles. Can you talk to us a little bit about your experiences at the beginning or an inflection point of an economic cycle and how we might want to think about sort of the next 12 to 18 months as to how that and it might impact your core electrical power business.

Speaker 2

Yes. Thanks, Alex. Normally, in other cycles, typically, when you're looking at inflationary pressure, natural gas at $8, It does impact the consumer. And the consumer, in my mind, as you start increasing bills, that The regulators certainly look at this. The problem I think this time was it's not a problem, it's what we're faced with as a country when we're going towards a carbon free environment And EV penetration has already left the building.

Speaker 2

There's no choice in my mind other than to put capital into these systems in order to enhance And modernize them for those impacts. The only pressure you could do is just stop. And I don't believe the country is going to stop The carbon free environment at this point, I'm not seeing there is load growth now. And when you think about it, in the past, there was no load growth. You're getting 2%, 3%, 5% load growth in places and that is offsetting some of the cost of capital going into the systems as well.

Speaker 2

So the ultimate Impact of the consumer for the grid build is not showing up, but the fuel cost, I do think natural gas needs to regulate a bit, Get down where it should be. And I do think that will help the bill and everything else. I don't see the real impacts that I would have seen we would have seen in the past. But we're always cautionary about the inflationary pressures. They're real in places and we should be prudent about how we think about it, but We're not seeing it show up at all, yet.

Operator

And then, sorry if I missed this, but what is your backlog within the telecom segment? And what is this backlog telling you about organic growth kind of on a go forward 12 month basis? Is it accelerating? Can we see double digit organic growth out of that segment?

Speaker 2

Yes. We're about $1,000,000,000 in backlog In telecom, we stay about $1,000,000,000 in backlog in telecom. We could build it, Alex. It's just something I find the carriers to be more cyclical And more spontaneous than our regulated utilities as well as our developers. And so we'll be cautious about that as we grow the business.

Speaker 2

We pace that growth On purpose, I do think the margins are upper single digits, going to double digits, which is really what we're after. So I'm happy where we said we could grow. I feel comfortable that our platform will allow us. The company has really worked Card on the portfolio, you're seeing it show up in the UI margins. I know we talked a lot about electric.

Speaker 2

We talked a lot about Renewables, but that portfolio, the way that we're displacing G and A and the things that we've done internally in this management team has really bought it into One single brand, one single location. You're seeing the impacts across the board at Quanta as we pick up the adjusted EBITDA.

Operator

Thank you. Our next question comes from Andy Kaplowitz with Citigroup. Please proceed with your question.

Speaker 5

Good morning, everyone.

Speaker 3

Hey, Andy. Good morning.

Operator

Dave, maybe you could

Speaker 9

give us more Color regarding your negotiations with utilities. Regarding re upping MSAs, are MSAs of the existing customers continuing to increase Given the amount of electric power work your customers have, is there evidence of them moving to more outsourcing? And are you seeing evidence of new MSA that your Customers likely are quite tight with their own labor.

Speaker 2

I think when you look at the customer, we collaborated quite a bit. Nothing's changed there. We continue to have a robust environment. Good macro markets sit well in the marketplace. Our ability to execute in the field safely, On time, on budget, it makes it easy conversation.

Speaker 2

It always has. As long as we continue to execute in the field, those conversations are pretty easy.

Speaker 9

So, Duke, maybe can you give us an update on what you're seeing in undergrounding, whether it's the PG and E project or Do you see undergrounding becoming a much more meaningful part of your business as you head into 2023?

Speaker 2

It's not only in the West. You're seeing undergrounding across the Gulf Coast for storm hardening. I do think underground will be a big portion of the West going forward. But it is moving forward, all the capital budgets, If you look back and you see where per mile, what the utilities in the West are anticipating in 'twenty three is substantially different than in 'twenty two. Early stages, The West is tough to work and there's a lot of permitting, a lot of environmental planning.

Speaker 2

I do think our front end business, we talk about it quite a bit, that the engineering permitting, all the things that we're doing on the front end is really helping us I'll get prepared for those bills and helping us with the client, the reduced cost on that. So I like where we sit there. I think it is something that You'll see in 23 show up and also in the Gulf Coast.

Speaker 9

Appreciate it.

Speaker 3

Sure.

Operator

Thank you. Our next question is from Sean Eastman with KeyBanc Capital Markets. Please proceed with your question.

Speaker 10

Hi, guys. Thanks for taking my questions. I wanted to come back to the comment about wind projects Being pulled forward, what does the sort of come back On the wind side, tell us about the anticipated margin progression in the Renewables segment, because I thought that and correct me if I'm wrong, but a lot of this year over year softness And the Blattner business that we're seeing in 2022, from a margin perspective, is that softer wind dynamic? So I wanted to check-in on that.

Speaker 2

I don't know if you're seeing any margin issues with Boitner. But that being said, it's down a little bit. I don't think it has anything to do with The wind or the platform, whether it's wind or solar, I think it had everything to do with Taking a prudent approach to it, worry through inflationary pressures as well as guidance and I we did that. On a go forward basis, the scale, I don't think the mix of work impacts the margins there in the segment. The segment does have Large electric transmission and as well as substation interconnect.

Speaker 2

So those kind of things are in the segment. It's not just flattener. And I do think as we move forward, certainly the wind coming in helps and but we're everybody Happy with Solar as well. I think when we see it, we thought we would have some delay in 22, we did, but we took that into account early even when we made the acquisition. And we also reiterated a long term On the $3,600,000,000 in $26,000,000 I do think that's pulled in.

Speaker 2

I think you'll see significant amount of growth there N23 as well as and beyond.

Speaker 3

Yes. And maybe color as well as we commented that we felt that Vladimir will be able to execute a double digit EBITDA levels and they continue to execute at those levels?

Speaker 2

Yes.

Speaker 10

They do. Okay, great. Yes, I didn't frame that question properly. I thought it was kind of exciting to see wind coming back in the mix. I guess, really, it's not a margin dynamic.

Speaker 10

It's more just additive to that stronger visibility around Growth for Renewables into the out years. And then

Speaker 2

So I'm not saying we can't increase margin on a go forward basis in the segment. If you it's all scale. Look, if it's solar, wind, it doesn't matter. If you get more scale out of it and Cover up G and A, we'll certainly increase the margins there.

Speaker 10

Okay. That's really helpful, Duke. Thanks for that. And then moving over to the cash flows, just This Canadian transmission project dynamic, is this more an element of working through The bureaucracy with the client versus some sort of point of contention with the client, is that a fair comment, Derek?

Speaker 2

This is Duke. I deal with them quite a bit, and we went through we had 2 large Projects won just completed. No one's ever been through COVID in Canada. So it's justification of cost Against where you're at for one part and then the way the milestone billing works on the second one. Look, we didn't anticipate the The delays and winter delays that we have today and so those milestones, we have to escalate them up, work with the clients get paid earlier.

Speaker 2

I don't think there's we're working through those now. There's no contention. It's just it's really a matter of fact going through it, justifying it and moving forward. Lot of paper, I would say, from my standpoint. A little more than normal.

Speaker 2

But look, it's we've been through this many times in Canada. We'll get through it with Good documentation. We know we've taken the same approach. We've taken every other one there. I'm only confident that we'll work through this in the coming quarters.

Speaker 2

I agree.

Operator

Thank you. Our next question is from Neil Motta with Goldman Sachs. Please proceed with your question.

Speaker 11

Good morning, team. The first question was around the renewables legislation that's making its way Through Congress right now and I recognize it's an unbelievably dynamic environment to try to process it, But just any early observations of what that can mean for the opportunity set in your business and clearly Could be positive for renewable energy infrastructure solutions, but do you see a way it could also tie into the electric power infrastructure solutions as well?

Speaker 2

Yes, for sure, anything renewable I'll go backwards on the question, but anything renewable in the legislation affects the grid, No question. And so anything we're talking about impacts the backside of the grid. And so I think, yes, A substantial increase in utility spend. Either way, I don't think look, the legislation is great. It's all incrementally positive.

Speaker 2

It's 7 80 pages, I don't want to comment on it other than just to say it's positive for us in many ways. And if it does pass as stated, we're extremely happy.

Speaker 11

That makes sense. And I just want to follow-up on the free cash flow question. I think Keith provide some clarity around a specific project in Canada. But can you help us bridge between the previous free cash flow guidance and this one and How much was that specific project versus other items? Thank you.

Speaker 2

That's why Derek came back. He's going to answer that.

Speaker 11

All right. That's why Derek is never going to do another one of these calls again.

Speaker 3

Yes. So look, I mean, the biggest portion of what drives our Cash flow is the working capital demand of the business. We've talked at length about the fact that higher levels of growth put Pressure on the working capital. At this stage, our organic revenue growth for the year will exceed double digits. And in the past, we've talked about when you see that, you could start Free cash flow conversions against EBITDA probably drifting down at like the 30% to 40% range.

Speaker 3

And I think if you look at the math, you're going to see it running about 35%. The uptick in the revenues for the year, about $400,000,000 Ryan, 10% to 11% trailing 12 months working capital is going to get you into about $40,000,000 to $50,000,000 The uptick in or the decrease in free cash flow is associated with the uptick in the revenue guidance. So I think it's all still running across Same formulas. Having said that, yes, I think the remaining delta would largely be the individual timing of the project issues we were talking about.

Speaker 11

All right. Thank you, sir.

Operator

Thank you. Our next question is from Gus Richard with Northland. Please proceed with your question.

Speaker 12

Yes. Good morning.

Speaker 3

Good morning.

Speaker 12

Thanks, Farah. Thanks for letting me ask a question on Derek's second final farewell tour. High powered semiconductors are kind of in limited supply. The largest supplier is in Germany. The OEMs that Provide utilities with equipment are not high volume customers, typically don't get favorable allocation.

Speaker 12

I'm seeing lead times as long as 50 weeks for IGBTs, etcetera. And I'm just wondering, my question is, the supply chain issues that your Are they getting worse? Are they getting better? What are your customers saying about this? And is it going to continue to cause disruptions in your business?

Speaker 2

Yes, we're seeing some of the spot really transformers honestly, I think are the bigger thing, distribution transformers are Kind of what I see, a little stuff here or there, but that's really what we're focused on, trying to collaborate with the client on those at this point. Some transmission items are we've seen some delay in those as well. But Look, our workforce is pretty nimble. We can move through these kind of issues and work with the client on those supply chains. Utility industry is very resilient.

Speaker 2

We're coming up with solutions on a daily basis in a collaborative manner. They collaborate quite a bit. I don't think this is long term. We're working through all these issues. You can double shift factories.

Speaker 2

You can do a lot of different things to expedite All the minor equipment. So look, there's always a big lag on your big HVDC transformers and Turbines and those kind of things. So I do think that is already baked in the system and we're working through these minor issues with the client. It is a place where I believe Quanta can collaborate and move forward the business on that end. And certainly, front side of our business, The planning and the things that we're doing there is helping us be successful to execute in the field.

Speaker 2

Got it. That was it for me. Thank you.

Operator

Thank you. Thank you. There are no further questions at this time. I would like to turn the floor back over to management for any closing comments. Yes.

Speaker 2

I want to first, I want to thank Eric For stepping in here, it certainly eases the mind to have someone of his caliber here on the management team. It shows a lot about the family aspect of the company. Jayshree is doing great and she's listening to the call. Hey, Jayshree. We know you've done a lot here in the quarter to make this successful.

Speaker 2

So thank you. And all the men and women in the field that make our job easy and make this call easy for us because you execute so well. We We truly appreciate you and everyone that participated in the call today. Thanks for your interest in Quanta.

Powered by Quartr
Earnings Conference Call
Quanta Services Q2 2022
00:00 / 00:00