Quanta Services, Inc. — 2024 Q1

Thanks, Jamie. Welcome back. I'll take the margin question. I think from our standpoint, when we look at the segment -- renewables segment, we had some series of projects there that -- a series of work, call it, 5% of the portfolio on the solar/wind side. They just didn't perform, didn't execute to where we should have executed that and what we expect from ourselves and what our customers expect. So yes -- look, it's a small piece. We grew the business, I can make tons of excuses, I am not. We own it. We didn't execute like we should. And the rest of the portfolio really is -- the majority -- the vast majority of the jobs, of the projects, of everything we're doing there is exceeding our expectations. We expect that to continue.

Sure. So a little bit, I think this is something we've talked about the portfolio and combining electric power and renewables together, and so I want to go through that a little bit.

I think the back half of '24, your distribution business starts to become increasingly -- I would say, you'd start booking more work, you start to see your MSAs, your crude counts move up again. There is some shift in the transmission versus distribution in certain areas, the Southeast and places where -- what's happening is you're seeing the data centers show up, you're seeing the demand show up on the transmission side. And you've already got your capital out if your utility customers -- so you have to build the transmission and you're going to pull capital off the distribution systems a bit and move it into the transmission systems.

We acquired Sherman+Reilly, which was blocks and pullers. If you're in the business, you're in the craft, you grew up with Sherman+Reilly as part of the ecosystem, it's been in business since 1927. It's something that I think from our standpoint, our people in the field, they deserve the product that's safe, the training that they have, what they do with the pullers and tensioners and the things that they have, the R&Ds they put into it, coupled with what we're trying to accomplish. It was compelling for us. There's a lot of wire talk about being pulled. There's new conductors out. There's lots of technology that we believe we can bring to market here.

No, SunZia is doing great. We're doing well. I think the team had a great plan. We put it together. All I see is good things coming out of that. We're progressing nicely. No issues on [ permanent ]. I don't think there would be, but there's no issues there.

Yes. Again, it's more utilization and returns for us when you start looking at pricing. When we think about it, we need to execute. We need to execute double-digit platforms that we've talked about over time. And I think it's more of that than it is some kind of pricing pressure. But I do think what we see it's so unique and tech really, really wants it now, they got money, they want to pay for it. It's just regulatory, the -- how do you set rates that are fair for everyone else. And it's starting to get -- you can see, it's starting to get figured out across the country of how to accommodate loads that we're seeing. But it's not going to happen overnight.

It's incrementally helpful, especially out west. But still state policies, state regulations, PUCs, commissions, we've got to get around the fact that load is significantly higher. And we've got an investment grid. It's -- we're late already, we're behind, I believe. And so we need to catch up and we need to make sure that this transition doesn't -- it's like sitting on a track and the train come at you.

I mean I do think gas generation is going to play a role in that and to some degree here in this transition. They still want renewables. Data centers want renewables. You're going to have to balance the load. Values aren't coming fast enough -- so you're going to have to balance a little of natural gas.

That's it.

Yes. Thanks for the question. Yes, we are seeing that progression. We do believe that as these projects progress across some various risks and contingencies, we'll be able to release some of that in the back half. You got to -- the segment is more than just solar/wind. There's a lot of transmission substation work. All of that is going to see a big acceleration, we believe, in the back half. And so that will fall in the margins as better cost absorption, and contingency releases can be obtained.

And I do think the conviction is history. And the history of both companies, both segments, we've operated in double digits, we're well below that. Growth is pressing a bit. We went through the jobs. Most of -- when we talk about what we had -- some degradation of margins, the degradation, it's new people and new roles, and so some of that shows up. And we've got to do a better job making sure that we educate and train our field leadership at times.

Yes. Justin, so I would say the revenue -- inorganic revenue contribution from the deals we did in the second half of last year as well as the announcements this year contributes around $500 million to $600 million. I'd tell you the 2 recent acquisitions, the revenue contribution there pretty much is offset by the divestiture of the oil and gas business. So we're still around $500 million to $600 million and EPS contribution around $0.15 to $0.20.

Well, that is, we had the sale of an investment in a pipeline, the gain on that. So which we did adjust out of EBITDA and adjusted EPS. So that's the biggest factor in that $25 million. We also had some gains on our deferred comp, but that gets offset in SG&A. So the real impact is around that gain around the pipeline investment, which we backed out in adjusted EPS and EBITDA.

I mean we had a great business prior to the AI coming in that we see fuel switching, we see EV penetration, we see renewables, fuel switching from coal. This is additive. And look, I -- you can't -- you're 24 months out, 36 months out today, if you say go. So no one is going to go, and that's why you're seeing exactly what you're seeing. Everyone is saying, why are we going to build this infrastructure, why are we going to build a generation unless someone guarantees the load.

Yes. I mean look, we've reconductored my career. And the new high-density wires, they run hot. They work in certain areas. It's helpful. But what I would say is -- what makes it easier, better, you're still -- it's still a rebuild, basically. You're just in the corridors that exists today. So yes, we can. We can even do it in energized state. We're doing 250 miles now energized while the line is hot and reconducting, which is -- we're specializing in it, we're training in it. So it's certainly an advantage to the company. We've spent tons of R&D here. We like the conductor. We certainly have installed plenty of the other high-density conductor, and we like it.

Yes. So free cash flow, I think just sitting here in the quarter, we did have a good free cash flow quarter. Pleased with that. But it's early. We think it's prudent given that our typical profile as of the first half of the year tends to be cash flow-neutral or slightly negative with most of the free cash flow coming in, in the fourth quarter. We still think that's where we need to sit right now. There is opportunity to be at the high end of that range. But I think the range where we are today is where we should be.

Alex, too, I would say the business itself we set out to change some of the cash flow profiles of the business. I think we've done a nice job from an internal-invested capital. When you look at the returns, the way we calculate them, certainly moving up in the business. Even when the margins are a little softer, the returns are fantastic.

We even bought the environmental solutions, it's sitting in really nicely. We really like the synergies we're picking up there on the industrial side. In fact the business is performing well. Telecom had a nice quarter. We got parity to the electric segment a little better. I mean we also added some backlog there. I like the business long term.

Yes. I mean we talk to them all the time. I do think there's opportunities to help and collaborate with them. Look, our job, we support our clients and our clients are talking to them as well. So it's just a -- it's something that we balance between the grid, what their demands are, try to help on both sides of that.

I don't feel like it's slow. I feel like we're doing great. It's a little bouncy on the distribution system, as we said in the past. Like I said, we're up 5.3% on transmission, distribution and substations, if you look at still look at the delineations of the segments as a whole. So I feel like we're starting nicely.

Yes. Mike, I think the company has done a nice job investing in craft certainly, which is what we're known for and core to us. I do think when you -- we saw some of it show up in the solar business in the quarter, where we had some growth and significant growth. And so it does, at times, that growth, you're investing in growth, you want to make sure that you can maintain the productivities and if you move geographies that you can maintain the type of productivities that we expect. And we expect high levels, and we've got to make sure we're looking back in the operations and helping make the young ones and the young people that are in the business go forward as far as -- and we are, and we have great programs and we get them to the field.

Yes. I mean, I think we've heard most of our customers -- I'll go backwards on that. Most of our customers maintain their capital guides and some increase. I still -- you got a backdrop of anything we're saying. You can look at the capital spend and what the customer is saying.

I mean, I think we see a lot of plans today on large-scale, hyperscale basis. And that loads got to go to them. And that planning process -- we do a lot of system planning. And that system planning process is probably robust today as it's ever been on the transmission load side of the business. We've got to get the distribution business a little better. And we've got to talk to the regulators and talk to them about what we're seeing and making sure that the consumer is not paying for the data center demand. So I think that's the bigger thing, the affordability.

I mean I would just say like we've talked about growing double digits, and we're growing double digits plus EV and wind and solar as well beyond that. But obviously, we're comfortable with double-digit growth in those businesses.

I want to make sure I understand the question, and it's a little spotty on my side here. As far as permitting, I mean, I think state permitting, in general, is fine. It's more about the regulatory process is a permit, in my mind. I don't think I caught the rest of the question here. Did you hear it?

He was asking about the innovation around...

We've seen some innovation -- sorry about that. Yes. My apologies. We've seen some innovation throughout the year. I think you'll continue to see it. There's things going on. But it's incidental really. I mean it's good, it will help, but the demand is such that we'll continue to see do that. We always go back and look at Europe and what's going on there, a lot of innovation in Europe.

Yes. The increase there was primarily driven by our Puerto Rican entity, our JV with LUMA. There was a favorable tax ruling that allowed for us to be able to -- the tax rate has dropped significantly. And so you're seeing around a $6 million improvement over the year as a result of that ruling.

No. I think to the contrary, the investments necessary there in methane releases, things of that nature. When you start looking at natural gas systems, they're more valuable today because we're not building as much new system. I mean there's a considerable amount of new systems being built, but in certain areas where you're replacing [ caster ] and other lines with polyethylene and more, you're building a modern network. That's certainly there and will continue to be there. We see an uptick in the business, not a downtick.

Yes. I want to thank the 52,800 people out in the field that pay our paychecks and do what they do everyday in inclement weather. We can't say enough about their performance and the safety and the things that they do on a daily basis. Our field leadership is the best in the world. The management team that we have here is certainly something that we're extremely proud of. We're proud of where the company is going, and thank you for participating in the call today.