Quanta Services, Inc. (NYSE:PWR) Q4 2023 Earnings Call Transcript

Quanta Services, Inc. (NYSE:PWR) Q4 2023 Earnings Call Transcript February 22, 2024

Quanta Services, Inc. beats earnings expectations. Reported EPS is $2.04, expectations were $1.97. 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 Quanta Services’ Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A 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 Kip Rupp, Vice President, Investor Relations. Thank you. You may begin.

Kip Rupp: Thank you and welcome everyone to the Quanta Services fourth quarter and full year 2023 earnings conference call. This morning, we issued a press release announcing our fourth quarter and full year 2023 results, which can be found in the Investor Relations’ section of our website at quantaservices.com. As highlighted in our earnings release this morning, as well as in the earnings press release announcing our earnings call schedule a couple of weeks ago, we’ve updated our earnings call format and supplemental materials. As a result, shortly after the release of our financial results this morning, we posted our fourth quarter and full year 2023 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, February 22nd, 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 would 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 the Quanta Services fourth quarter and full year 2023 earnings conference call. This morning, we reported fourth quarter and full year 2023 results, which included double-digit growth in revenues and earnings and included a number of record financial metrics, which we believe reflects robust demand for our services and solid execution. Total backlog at year-end was $30.1 billion, which we believe reflects the value of our collaborative client relationships, and evidences the momentum we see for 2024. Of note, Quanta has delivered record revenue six of the last seven years. Six consecutive years of record adjusted EBITDA and seven consecutive years of record adjusted diluted earnings per share.

These results were built off an industry-leading operational and financial platform, and made possible by our more than 50,000 dedicated Quanta employees, whom we believe are the very best in our industry. As outlined in our operational and financial commentary, 2023 was a significant year for Quanta strategically, operationally, and financially. And though we are proud of our many accomplishments during the year, we continue to look forward with excitement towards the multiyear strategic initiatives, we are working on and the goals we expect to achieve in this and the coming years. We are 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 strategic advantage that provides us the ability to manage risk and ship resources across service lines and geographies. Which we believe will become increasingly important, as the energy transition accelerates. We believe our portfolio approach positions us well to allocate resources to the opportunities we find the 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. Jayshree?

Jayshree Desai: Thanks Duke and good morning everyone. Quanta completed the year with fourth quarter revenues of $5.8 billion, net income attributable to common stock of $210.9 million or $1.42 per diluted share, and adjusted diluted earnings per share of $2.04. Adjusted EBITDA was $550.2 million or 9.5% of revenue. Of note, our cash flow in the fourth quarter and for the full year was very strong with both setting period records. For the fourth quarter and full year of 2023, we had free cash flow of $915.5 million and $1.2 billion, respectively, which exceeded the upper end of our free cash flow guidance expectations. We ended the year with liquidity and a balance sheet that will position us to support our organic growth expectations in 2024, annually increase our dividend, and opportunistically invest capital.

To that end, in January, we acquired two companies for aggregate consideration of approximately $425 million. This morning, we also provided our full year 2024 financial expectations, which calls for another year of profitable growth with record revenues, improved margins 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, our 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: Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Chad Dillard with Bernstein. Please proceed with your question.

Chad Dillard: Hi, good morning everyone.

Duke Austin: Good morning.

Jayshree Desai: Morning.

Chad Dillard: So, I want to spend some time on margins, particularly in Electric Power. So, I think in some of the prepared remarks or it sounds like there is some pressure happening in Canada. So, I just wanted to know whether you plan to right-size the business? Or is there no future work out there to continue at the current footprint? Just trying to think through how you think about the trade-off there?

Duke Austin: Yes. Thanks Chad. When looking at margins, I think we’ve always discussed around 10% at the Electric segment, 10.5% with the impact of Puerto Rico is how you should guide it. We continue to believe that’s the case. Is there opportunity for upside on the Electric side? Yes. We do believe there is. It depends on storms. It depends on utilizations. We need to get through some things. As we start our larger projects in the Renewable segment and in the Electric segment, we’re in early stages of the larger dynamics such as SunZia, other big programs that we’re starting. So, as we get good cadence and as we continue to win these larger projects in the future, the cadence will be — we’re always running through contingency philosophically.

We need to operate in the field. We need to execute as we do, we’ll release contingencies, as we see it. And normally, there’s upside opportunities in both segments. We’ve historically operated in both segments in double-digit type margins, and we believe we can operate there in the future. Certainly, we’ve been through some things where the business has been with the panels and some other things on the renewable side. That’s starting to kind of starting to get good cadence there. It’s early, we’ll see where we get to by the end of the year, but we feel confident over time in our historical numbers that we’ll be able to operate in double-digits if you — especially if you take both segments as one. If the crews do move from one to the other.

So, for me, the Renewable segment and Electric segment, as I see it, put them together and we should be able to operate in double-digits.

Chad Dillard: Okay, that’s helpful. And so in your prepared commentary, you mentioned that visibility of high-voltage transmission projects is improving. Can you give a little more on this, what’s changed? And how much more visibility do you have?

Duke Austin: Look, we’ve said all along, and we think that the nation’s grid is underinvested in transmission. I don’t think that’s news to anyone that we said, if you go to Europe and you look at the way the things happen in the corridor is it three times bigger than anything we have here. We’ve barely invested in the transmission system of this nation. And in order to do the things that we want to do with this transition, whether it be EV, whether it be batteries, your fuel switching, the cheapest form to get the generation to the customer is transmission. So, I think that’s the key to this and the whole key of the securitization of the country as well as for us to get to a carbon-free environment, we’ll have to build tons and tons of transmission.

So, I think you’re — we’re just getting started in these bigger projects. We’re seeing more and more come in our way. There is some push on clean affordable energy. But I believe that the transmission is the cheapest way as well. So, I — we’re seeing more on the books. We’re continuing to be around the edges on all those projects. So Chad starting, and we’re confident in our ability to execute and win.

Chad Dillard: Great. Thanks. I’ll leave it there.

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

Ati Modak: Hi, good morning team. Thank you for taking my questions. I just wanted to touch on the acquisitions. You previously talked about your thought process there. I think it was mostly trying to internally source your capabilities. But maybe if you can touch about — touch on the two acquisitions you’ve made and the thought process around the industrial solutions side, in particular, as you go forward from here?

Duke Austin: Yes, the acquisitions, as we look at them, truthfully, I think we’ve always said that the industrial business, as far as in the UUI segment, we like it, it’s resilient. The nature of it is much like our MSAs on other businesses. The environmental solutions that we can provide on the industrial base, we believe that the base of the business will stay for decades, you’re going to continue to refine, continue to have plastics and things of that nature done on the Gulf Coast. So, the assets that keep the plants running and things of that nature will certainly be here for a long time and be more valuable over time. We’re in the cables [ph] business as well, where we have high voltage and now, our environmental solutions business, we like them all through.

There are synergies along. There was very little overlap in the business. So, it gives us really a good customer base. We don’t apply synergies in our model. So there is synergies for sure. As we move forward, we’ll identify them and I think you’ll see them show up on our numbers. So, we like the management team on our industrial side. We’re fully behind that for the long run, great opportunity to get an environmental piece of the business here and really see our service line grow and expand in that area. So, again, we’re — the portfolio is something that we value, as things move around, but the industrial base and the industrial side of our business is great, coming off a near record or record year, very close to it. So, we’re confident long-term and — the second piece of it was an internal supply chain that we feel like necessary to, from a cost standpoint as well as to make sure that we can — we self-perform about 85% of the work, between 85% and 90%, and the tooling and all the equipment and things that we can do from this platform really allow us to make sure that we can man the work, man of people, any kind of bottlenecks for us, they’re not acceptable.

So, we’ll make sure the supply chains are steady and that we can continue to grow.

Ati Modak: Thanks for that. And then I think there has been a lot of market concerns around how your customers are thinking of projects. And I know you’ve mentioned the requirement around transmission and guide came in a lot better than what I think a lot of the Street was expecting. But maybe you can touch on how your customers are thinking of this year and the sensitivity around this potential regulatory changes, anything that’s latest in your conversations?

Duke Austin: Yes, I’m not seeing that. I’m not hearing that, I’m not hearing our customers back off anything. I’ve heard some switching from distribution and transmission, but their capital continues to grow. You have data centers, you have load growth, that’s pushing in every jurisdiction we’re in. The data centers are not going away, that load is not going away. The onboarding of manufacturing is not going away. EV penetration may stall a bit. We’ve always said we think that this is a longer build, not shorter. So, they were saying 2030, maybe it’s 2040, maybe it’s 2050 for all EV penetration. But that’s something on the distribution system that is not impacting as bad yet. We do need to plan as an industry. We do need to get in front of that, but we also have to be cognizant of the state regulators and as well as affordability at the customer level, ultimate customers.

So, yes, we’re concerned with that as an industry. So, distribution is something that you may see slip a little. The demand and what needs to be done to the system in order to electrify it, securitize it, is there, and it has — it remains. Data center push is now in generation switching is now. So, you’ll see probably some switch into transmission. It does not affect our portfolio whatsoever. The numbers you can see them. We stand by them. We’ve given good guidance. We’ve taken all this into account, when we give out the 12-month guidance. And look, it’s a prudent number in my mind. It’s right where we need to be.

Ati Modak: All right. Appreciate the answers. Thank you. I’ll turn it over.

Operator: Our next question comes from the line of Durgesh Chopra with Evercore. Please proceed with your question.

Durgesh Chopra: Hey good morning team. Thanks for giving me time. Duke, I’m actually going to flip the last question. So, we’ve seen your utility customers kind of raise CapEx in high teens. Even Illinois companies came out with their latest CapEx guidance, double-digit increases. What is factored into your 2024 guidance? Should we assume that the forward-looking capital plan increases are factored in? Or are you still learning them? And I guess what I’m asking is what kind of conservatism are you baking into 2024 guidance, as you’ve seen a pretty significant step up, quite frankly, a step change in utility CapEx plans?

Duke Austin: I think we’re in a good spot for the start of the year, where we’re at. And when we look at it, we look at our historicals, and we’re going to talk about EPS growth. If you look at EPS growth, what we’ve said is we grow double-digits in the CAGR basis, have the opportunity to grow 15%, the transition, everything that’s ongoing that can allow that 15% growth. If you go back and you look at our historicals, it’s 15% growth. So, do I think there’s opportunity? Yes. It depends on storms. It depends on other things that are out of our control at times. So, we’ll take a prudent nature to it, election year, things like that. We’ve taken all that into account, when we give guidance. I do think there’s opportunities for us to grow 15%.

I do. We’ve said it. And I don’t think it’s changed. I think — when I look at it, when I look at our opportunities, given the fact that the tech push on AI, on all the things that you can do from a data center, it’s backing up everything plus. So, your fuel switching is one thing, but when you think through it and you see the load growth in data centers, it really pushes the transmission system and generation system because at tech, they want clean power, and they want it now. So, I think that push on the industry is something that is why you’re seeing such confidence in the capital spend in the transmission systems. It does affect our distribution a bit. I said it, but, we’ve taken all that into account, I expect latter half of the year, distribution to grow as well in a meaningful way.

So, it’s something that we’ve taken into account.

Durgesh Chopra: Got it. That is very clear. Thank you. And then maybe could you just address risks related to the SunZia project, and I’m not sure if you can, but can you quantify what are you modeling is, is EBITDA for those projects?

Duke Austin: We don’t look at it project-by-project like that. I’m confident in the numbers we’ve given. SunZia, the whole thing was about 50 miles. I think the job is 1,000 miles. We have plenty of room to move and work with our client on stretch, as a right away here or there, but that is not a meaningful — a bit will alleviate as we move through. We’re not concerned. The project starts now, ramps throughout the year, part of why you see some guidance move into the second half as the ramp on these larger projects in the back half. But they’re known projects, they’re contracted projects. So, that’s the difference is we know we’re moving on and now and we know what the ramp looks like, in the back half. And I do expect us to get more awards in the back half. And so we’ll continue to ramp. It’s just — it’s some seasonality that you see early that ramps in the back. But SunZia, I’m not concerned at this point.

Durgesh Chopra: Thank you very much. Appreciate the time guys.

Operator: Our next question comes from the line of Steven Fisher with UBS. Please proceed with your question.

Steven Fisher: Thanks. Good morning and congrats on a nice 2023. Just curious how we should think about that 20% growth in the renewables segment in 2024? Clearly, there’s SunZia, I think there’s maybe a piece of PTT, that you are allocating into that segment. So, how should we think about the growth rate of the renewables business separately from those couple of pieces? And really just trying to think about the big picture here about renewables. I mean SunZia is kind of a unique project. But at a higher level, to what extent do we think like this is the year where Renewables kind of breaks that out from a more restrained 2022 and 2023 from some of the various uncertainties that have been going on in the marketplace?

Duke Austin: I don’t know what our growth was last year, but it was significant. So, — and then 2022 is significant. So, I think from our standpoint, we’ve had phenomenal growth in the renewables side, both in 2022 and 2023. Off those big growth on balance of plant, solar, wind. And when you go into 2024, we’ve got good growth in double-digits plus, on both sides of that, whether it be our legacy business or balance of plant going forward. We continue to see 2025, 2026 and beyond, there is some pressure with — when you think about when wins starting to come in for us with SunZia and other repower opportunities there, Steve. So, we’re starting to see some assets like cranes, things like that, that we were sitting on some indirect costs on the wind side of the business, that will help the overall margins in the back half.

As we see wind come in with the solar as that mix starts to change a bit more you’ll continue to see margins move up due to some of the overheads and indirect costs that move through, as well as our Canadian operations are looking better from the renewable side. So, all those things will come into impact, you’ll continue to see margins move up and I do believe the top line in the renewables segment will move up.

Steven Fisher: Great, that’s very helpful. And then when you think Duke about the portfolio approach that you’ve been implementing, where do you think that’s going to have the biggest benefit impact in 2024? Curious where the kind of the directional flow is mostly going to be? Is it still sort of underground work moving to Electric segment, Canada to the U.S.? Anything else to note about how to think about the portfolio approach in 2024?

Duke Austin: From a service line standpoint, I think our distribution business will start to ramp in the back half more than it is today. Canada geographically is down. We know it’s down. We’re seeing latter half of this year, 2024 with awards and how we’re starting projects in the latter half of 2024 and also what we’re seeing from government to the west in BC, as well as the East. So, we’re seeing the amount of capital getting put into the same kind of fuel switching you’re seeing here in the States. So, I do believe Canada starts to move back into good markets, call it, late 2024 and beyond, as far as we can see. So, it does help us there. But we’ve rightsized that business. And yes, it’s pulling margins down a bit in the States, but the assets there.

We’re utilizing here, in Lower 48 as well as across the company. So that’s where the portfolio comes into play, the front side of our business, things like that, that we have there, that gives us some abilities, here in the Lower48. Look, we’re not hitting on all cylinders. So, I would say, as the portfolio as that moves forward, both geographic and service lines, as they mature, you’ll see some undergrounding move from gas to electric. But look, we’re taking advantage of those leverage — things we can leverage at the local levels and making sure that we’re in the right place. I’m not too concerned with if we’re pulling electric pipe or gas or whatever it is, we’re just trying to optimize our resources. So, that’s the big thing. It should increase margins.

We’re not where we want to be from a company in the portfolio, a double-digit type EBITDA margins, across the board. We do believe we can operate there. So, as we look at the portfolio and everything that we’re doing, it should be the optimization of our margins. But I will say that if you look at the way of adjusted returns, our returns are going up substantially. You can see it with cash, you can see return on invested capital.

Steven Fisher: Very good. Thanks so much.

Operator: Our next question comes from the line of Michael Dudas with Vertical Research Partners. Please proceed with your question.

Michael Dudas: Morning Jayshree, Kip, Duke.

Jayshree Desai: Morning.

Duke Austin: Hi Mike.