Quanta Services, Inc. (NYSE:PWR) Q1 2024 Earnings Call Transcript

Quanta Services, Inc. (NYSE:PWR) Q1 2024 Earnings Call Transcript May 2, 2024

Quanta Services, Inc. beats earnings expectations. Reported EPS is $1.41, expectations were $1.29. Quanta Services, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Greetings and welcome to the Quanta Services First Quarter 2024 Earnings Conference Call. At this time all participants are in listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host Kip Rupp, Vice President, Investor Relations. Thank you. You may begin.

Kip Rupp : Thank you, and welcome everyone to the Quanta Services first quarter 2024 earnings conference call. This morning we issued a press release announcing our first quarter of 2024 results, which can be found in the Investor Relations section of our website at quantaservices.com. As highlighted in our earnings release this morning, we’ve recently updated our earnings call format and supplemental materials shortly after the release of our financial results this morning, we posted our first quarter of 2024 operational and financial commentary and our 2024 outlook expectation summary on Quanta’s Investor Relations website. While management will make brief introductory remarks during this morning’s call, the operational and financial commentary is intended to largely replace management’s prepared remarks, allowing additional time for questions from the institutional investment community.

Additionally, we no longer have a slide presentation to accompany this call, as the information that has historically been included in the presentation can now be found in our operational and financial commentary. Please remember that information reported on this call speaks only as of today, May 2, 2024, and therefore, you are advised that any 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, including all statements reflecting expectations, intentions, assumptions or beliefs about future events or performance that do not solely relate to historical or current facts.

You should not place undue reliance on these statements as they 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 implied. We will also present certain historical and forecasted non-GAAP financial measures. Reconciliations of these financial measures to their most directly comparable GAAP financial measures are included in our earnings release and operational and financial commentary. Please refer to these documents for additional information regarding our forward-looking statements and non-GAAP financial measures. Lastly, if 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. With that, I’d like to now turn the call over to Mr. Duke Austin, Quanta’s President and CEO. Duke?

Duke Austin : Thanks Kip. Good morning everyone, and welcome to Quanta Services first quarter 2024 earnings conference call. This morning, we reported our first quarter of 2024 results, which included double-digit growth in revenue, adjusted EBITDA and adjusted earnings for share and strong cash flow demonstrating an overall good start to the year. Total backlog at quarter end was $29.9 billion, which we believe reflects the value of our collaborative client relationships and evidences the momentum we see for 2024. Utilities across the United States are experiencing and forecasting meaningful increases in power demand for the first time in many years, driven by the adoption of new technologies and related infrastructure, including artificial intelligence and data centers as well as federal and state policies that designed to accelerate the energy transition and policies intended to strategically reinforce domestic manufacturing and supply chain resources.

With the complexities of the power grid and the significant upgrades and enhancements required to facilitate low growth, our collaborative solution based approach is valued by our clients more than ever. We continue to look forward to the realization of our multi-year strategic initiatives and the goals we expect to achieve in this and the coming years. With our positioning Quanta for decades of expected necessary infrastructure investment and believe our service line diversity creates platforms for growth that expand our total addressable market. Our portfolio approach and focus on craft skill labor is a strategic advantage that we believe provides us the ability to manage risk and ship resources across service lines and geographies, which is increasingly important as the energy transition accelerates.

We believe, our diversity and portfolio approach has also improved our cash flow profile and positions us well to allocate resources to the opportunities we find most economically attractive and to achieve operating efficiencies and consistent financial results. I will now turn the call over to Jayshree Desai, Quanta’s CFO to provide a few remarks about our results and 2024 guidance. And then we will take your questions. Thanks. Jayshree?

Jayshree Desai: Thanks Duke and good morning everyone. This morning we reported first quarter revenues of $5 billion. Net income attributable to common stock of $118.4 million or $0.79 per diluted share and adjusted diluted earnings per share of $1.41. Adjusted EBITDA with $387.3 million or 7.7% of revenues. Of note, we generated healthy cash flows in the first quarter with cash flow from operations of $238 million and free cash flow of $181.2 million. Both settings first quarter records. This earnings and cash flow performance allowed us to end the first quarter with ample liquidity and a balance sheet that supports both our organic growth expectations and the opportunistic deployment of capital to generate incremental returns for our stockholders.

To that end, year to date, we had acquired four companies for aggregate consideration of approximately $500 million. This morning, we also provided an update to our full year 2024 financial expectations, which calls for another year of profitable growth with record revenues and opportunity for double-digit growth in adjusted EBITDA, adjusted earnings per share and free cash flow. We believe our expectations demonstrate the strength of our portfolio approach to the business, our commitment to our long-term strategy, favorable end market trends and our competitive position in the marketplace. Additional details and commentary about our 2024 financial guidance can be found in our operational and financial commentary and outlook expectation summary, both of which are posted on our IR website.

With that, we are happy to answer your questions. Operator?

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Q&A Session

Operator: [Operator Instructions] Our first question comes from the line of Jamie Cook with Credit Suisse.

Jamie Cook : Congrats on the quarter. I guess just two questions. One, shorter term, one longer term. Jayshree, could you just talk a little bit about the renewable margins? I think they fell a little short relative to expectations and how and — any color I guess behind that. And then I guess the second question would be for Duke, just a longer term question, obviously lots of talk throughout the past couple of months on AI data centers, et cetera. If you could just talk to just because you’re so close with and how that impacts, I guess, grid load growth, if you could just talk to what you’re hearing from your customers in terms of how they’re going to approach this, how you think about CapEx trends accelerating. Just any color around how Quanta would be positioned there?

Duke Austin: I’ll take that margin question. I think from our standpoint, when we look at the segment renewable segment, we had some series of projects there that a series of work call it 5% of the portfolio on the solar wind side that just didn’t perform, didn’t execute to where we should have executed at and what we expect is from ourselves and what our customers expect. Look, it’s a small piece where we grew the business. I can make tons of excuses. I’m 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 expectations. We expect that to continue growth, growth creates some inefficiencies and we showed up so we got to fix it.

And it’s not something that — it’s later stage in the projects. And so I’m not concerned, it’s just part of it. First quarter seasonality and everything else, a little bit of noise shows up. But all in all, I think, the segment’s performing nicely, what we see in the future looks great. The backlog is certainly accelerating in the renewable segment. We’re excited about what we see going forward. We are executing for how many people we’ve put in the field and what we’ve added to this segment. I feel real good about it. We do invest in growth. It has some inefficiencies, as you move forward and showed up. I think all-in-all, we like what we see. As far as data centers, I think the macro demand of electricity is obviously moving up. And anytime you have demand, it’s great for the business, it’s great for our customers.

It you go back, you roll it back, call it nine months ago, we knew some data center demand, but nothing like we saw show up in January, February, March. It caught me off guard a little bit to see the amount, you’re talking one customer’s talking a hundred gigs. When you start talking about one customer with a hundred gigs, it’s mind blowing in my mind that to think about the amount of electricity necessary and primarily wanting renewables. Both sides of the business, both R&D and our renewable business stand to gain quite a bit and our customers as well. But it’s not easy from a rate base. It’s not easy to deal with those kind of things showing up at your doorstep, when you’re trying to plan for 30 years and you build out huge power plant and it’s gone in one day.

So I think the planning piece of the business is difficult. It is certainly showing up, it’s certainly pressing us, our customers everyone to plan better and to think longer term. We’re trying to put a four decade, three decade type build in 90 day windows. It doesn’t work. It’s a very long term build here. I think the company’s set right in the middle of it. I like where we sit from the ancillary piece of data centers. I like we’re talking to hyperscalers, we’re talking to all of them about how we can help benefit and collaborate with our clients and them to get power sources and certainly in demand. It’s a unique time. It is exciting. We’re excited about it. We’re excited to work with our clients and they expect a lot of us, we need to deliver and execute.

Operator: Our next question comes on the line of Andy Kaplowitz with Citi.

Andy Kaplowitz : Duke or Jayshree, can you give us a little more color into electric power? What happened in the quarter and going forward? Revenue was, as you know, down just a little bit but margin was quite a bit higher than you forecast and I think quite good for seasonally weak Q1. You didn’t change your expectation for the second for the year, but maybe you could talk about your confidence that distribution focused revenue does improve in the second half and does the higher margin Q1 signal potential for margin upside in the segment?

Duke Austin: 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. If you look at the electric business, which is transmission, substation and distribution, and you look across the segments. The segments are delineated today, which is causing some, when you print the numbers, it doesn’t look like what the business is from those three things. An electric work type, it’s up over 5% in the quarter. That’s because pieces of the business is over in renewable segments and the pieces of it are in the electric segment, but the business itself together is up 5.3%. So it’s just the way the segments look, you’ve got to combine them.

It’s got to look like a portfolio. The delineations are causing some number print. It doesn’t look like with where the business is at. I wanted to explain work type, which is electric substation distribution and transmission are up 5.3% in the quarter, and our backlog is almost flat. Yes, I think the backlog of the business and what we see, there’s timing, there’s MSA timing, it’s early, it’s the first quarter we fully expect to be at record levels. We’re the bigger projects. The renewable projects are complicated. We take a long time to negotiate. We’re not going to press negotiations against a 90 day print. It just doesn’t make sense for us. We’ll be patient. We’re not concerned. We see an outstanding, we were just talking about load growth.

Anytime you got more load, you got more business. It’s simple when you think about it. More demand, more business. We see more demand than we’ve ever seen. I feel good about it. As far as margins, the electric print we operated great even in the down. We’ve always said that we can operate in double-digits, doesn’t matter what the revenue is. That’s what we’re really trying to drive is that EPS and those margins. In the segment, I thought we had a nice performed well in this segment and like where we’re going, I think there is opportunity. It’s early. We’re not going to change guidance in 90 days, so it looks good. We have lots of opportunity. I would say we have more upside than we do downside on the go floor basis in a second.

Andy Kaplowitz: Duke, maybe just to follow-up on your commentary, last quarter you mentioned sort of the better visibility around large transmission projects. You just talked about MSAs in answering my question. Just the conviction level in sort of the backlog increase, again, I know it doesn’t happen in a quarter, it happens over the year, but is it more base business you think that grows or larger project business that grows in ‘24? Is it both?

Duke Austin: Look, I think the back half of ‘24, your distribution business starts to become increasingly, well, I would say, you’d start booking more work. You start to see your MSAs, your crew counts, move up again. There is some shift in transmission versus distribution in certain areas, the southeast and places. 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. It’s fine, that’s why we’re diversified. That’s why the company sits where it sits.

We’re able to be nimble and move. It’s not an issue, but it does show up. And your MSA work on the distribution side is softer than normal, and that’s we talked about that in the fourth quarter, where we’re working 40, 50 hours versus 70. I think that’s still the case. I do believe as you move into the later part of the year, you’re going to start seeing us work more. I’m inclined to say more 60, 70 hour weeks and our head counts still almost 54,000, which is up 4,000 year-over-year. I feel highly confident that as EV starts to penetrate to the west, that’s moving up already and the EV kind of moves across. We’ve got to build infrastructure and certainly we see it showing up in certain areas.

Operator: Our next question comes from the line of Ati Modak with Goldman Sachs.

Ati Modak : I wanted to take a few moments to talk about some of the M&A activity in the quarter both there’s an active quarter from bolt-on acquisitions and also some divestitures. Talk to us a little bit about what excites you about what you added to your portfolio and how does this all fit into the strategy?

Duke Austin : We acquired Sherman+Reilly, which was blocks and pillars. If you’re in the business, you’re in the craft. You grew up with Sherman+Reilly as part of the ecosystem. It’s 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 pillars and tensioners and the things that they have, the R&D that they put in into it, coupled with what we’re trying to accomplish, it was compelling for us. There’s a lot of wire, talked about being pulled. There’s new conductors out. There’s lots of technology that we believe we can bring to market here. And lastly, I concern with the capacity, we’re always concerned with supply chain capacity.

It’s something that I believe is very specialized. It needs to be safe. We need to protect our people a bit and make sure it’s in good hands. And a lot of our clients use the pillars as well in their internal resources. It’s certainly something that we value and we’re real proud to have that piece of business. As far as the divestiture, divestiture is basically an oil and gas legacy business that we’ve had since probably 2015 or before. And certainly something that we’ve looked at for a long time to say, this is not something that we’re going to invest in. It’s better off in other people’s hands, it’s international. The company’s made the decisions not to go into international at this point. It’s something need to be dive in someone, it’ll do great.

The management team’s fantastic. The new owners will be happy with the visit.

Ati Modak : The follow-up is just on the SunZia project. Obviously, it’s a very important project for the company. Just give us the latest temperature or latest progress report there, and anything we should be watching out for, whether it’s some of the litigation stuff or just in terms of managing through execution challenges that inevitably happen with big projects.

Duke Austin : SunZia going 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 permit. I didn’t think there would be, but there’s no issues there. Big long line, it could be noisy here or there but I’m not seeing anything on that. But really good production safety is great, working hand in hand with the client. I continue to like that project. We’re early in it, opportunities to release contingencies as we go through it. I really believe that it’s going to be nice one. I actually wish I was running it’s a fun one.

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

Brian Brophy : Just continuing the conversation on the low growth discussion around data centers, we’ve seen some pretty eye popping estimates in terms of what that may mean. You alluded to some of that earlier in your comments. Just curious how you’re thinking about the industry’s capacity to meet some of these demands and what that might mean ultimately for your pricing and margins?

Duke Austin : Again, it’s more utilization and returns for us, when you start looking at a pricing, when we think about it. We need to execute. We need to execute and 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’ve got money they want to pay for it. It’s just regulatory, how do you set rates that are fair, that are for everyone else. 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. If you want renewable resources as well, it’s another complication when you start to talk about it.

We were already fuel switching, now we’re fuel switches and doubling load in 90 days things like. But in general, I would say that load is real. It’s coming and people are paying for it. It creates demand across renewables and our electric segment, we need a robust grid, the cheapest form of generations transmission, it always will be. I like where we fit in, we can help. It certainly, we talk about a solution based approach. If there’s ever been a solution based approach that it’s going to work, it will be within this, because it’s complicated on how to get renewables to load sources. And you’re seeing, power plants, nuclear power plants get bought really with the whole power plant going towards data centers. So you never thought we would see that in my lifetime.

And now we’re seeing it show up and it’s creating some unique circumstances across the country. And it’s not only in Virginia, it’s across every single customer we have that 3 megs, 4 megs show up and it’s tomorrow, they want tomorrow and they want it in a renewable state. I like it. I like where we sit. We can certainly help, we can certainly sit on both sides of that. I like what we can accomplish. We just got to plan more, plan better, both on distribution and on transmission and collaborate with the client. The better we serve the customer, the better the company will do.

Brian Brophy : I guess one other one, I think the DOE announced some permitting reform to some grid capacity, transmission lines, streamlining some of the environmental reviews here a few days ago. Curious how impactful you think that might be?

Duke Austin : 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 track the train comes. You’ve got to invest in infrastructure. The more modern your infrastructure is, rates go down a few basis when you look on a go-forward. So investment now pays off for the next generation. So you do have to invest in it. And I think that’s the case today, and we need to be going.

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

Marc Bianchi : The first one I wanted to ask was on related to this load growth outlook with the data center stuff that everybody has been talking about. What role do you see for gas-fired generation? And how is your business exposed to that, if perhaps some of that occurs behind the meter at the customer site?

Duke Austin : 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 both. Values aren’t coming fast enough, so you’re going to have to balance a little of natural gas. The problem I see is a lot of gas-fired is coming into play. If you talk about a 1 gig, 2 gigs, 3 gigs, 4 gigs of gas-fired generation, you’re still off 96 gigs. So you can’t build enough generation — enough renewable generation for what we see coming. So I do believe that you need to balance the load and it will help. Batteries are coming along. But I still — if you try to build a piece of pipe in this country to feed natural gas systems, therein lies the problem. I hear it, I mean I see it, I see 10, 12 gas-fired generation plants being proposed. I still don’t know how we’re going to get the piece of pipe to it to feed them.

Marc Bianchi : Yes. Sorry, Duke, go ahead.

Duke Austin : That’s it.

Marc Bianchi : Okay. The other question I had was on the renewable margin progression. So if I look at where — for the second quarter is discussed to be maybe just below 8%, and then you’re going to be double-digits in the back half. Can you talk about what’s driving the conviction in that improvement? And then also, I think in the past, you talked about some contingency release that would come later on in the project time line. I’m curious where you are with that in the back half of this year.

Jayshree Desai : 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 of better cost absorption and contingency releases can be obtained.

Duke Austin : And I do think the conviction is history. And the history of both companies, both segments, we’ve operated in double-digits, 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. And so that said, we went through the projects. We feel good we’re 50-60 type — renewable-type jobs that are out there today and they’re bread-and-butter. So for us, we’re looking at it, we’re looking at backlog. We see a nice runway, decade runway here. So I really feel comfortable that we’ve invested in the right spots and that years intact, in fact, with opportunities still in it.

And yes, we’re not pleased with the quarter by any measures. And I can promise you the leadership in the field is not pleased. So we expect a lot out of ourselves. Our customers expect a lot out of us. And even in the good times, we’re running it pretty hard. So we’ve made the necessary changes to make sure that not only that we perform at the double-digit-type level but also that we don’t let it drag on or we don’t — it doesn’t catch us by surprise or anything like that. We see it. And we saw this early. And we made some adjustments. We won’t be able to operate on a few projects. And we’re talking about 5% out of the whole thing and probably like, I don’t know, I think it was like $15 million or something like that as maybe within the operations.