Quanta Services, Inc. (NYSE:PWR) Q3 2023 Earnings Call Transcript

Quanta Services, Inc. (NYSE:PWR) Q3 2023 Earnings Call Transcript November 2, 2023

Quanta Services, Inc. beats earnings expectations. Reported EPS is $2.24, expectations were $2.14.

Operator: Greetings, and welcome to the Quanta Services Third Quarter 2023 Earnings Conference Call. At this time all participants are in a listen-only mode. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Kip Rupp, Vice President and Investor Relations. Thank you, Kip. You may begin.

Kip Rupp: Thank you, and welcome, everyone, to the Quanta Services third quarter 2023 earnings conference call. This morning, we issued a press release announcing our third quarter 2023 results, which can be found in the Investor Relations section of our website at quantaservices.com, along with a summary of our 2023 outlook and commentary that we will discuss this morning. Additionally, we’ll 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, November 2, 2023. And therefore, you are advised that any time-sensitive information may no longer be accurate as of any replay of this call.

A worker wearing a safety vest supervising a team of bulldozers leveling the ground for a road construction project.

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 or 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’ll 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 slide presentation.

Please see Slide 2 of the appendix of the slide presentation for additional information regarding our forward-looking statements and non-GAAP financial measures. Lastly, if you 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 now like to 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 third quarter 2023 earnings conference call. On the call today, I will provide operational and strategic commentary and we’ll then turn it over to Jayshree Desai, Quanta CFO, to provide a review of our third quarter results and full year 2023 financial expectations. Following Jayshree’s comments, we welcome your questions. This morning, we reported our third quarter results, which included strong double-digit revenue growth and a number of record financial metrics, which we believe reflects robust demand for our services and solid execution. Of note, our Electric Power Infrastructure Solutions and Renewable Energy Infrastructure Solutions segments drove our revenue and profit growth, reflecting ongoing capital deployment into grid modernization and hardening.

Power grid expansion and construction of new renewable generation and other necessary investments needed for North America’s emerging energy transition. Total backlog at quarter end was $30.1 billion, an all-time record high, which we believe reflects value of our collaborative client relationships and indicates momentum for 2024. We are positioning Quanta for decades of expected necessary infrastructure investment and continue to believe our operational portfolio is a strategic advantage that provides us the ability to manage risk and shift 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 most economically attractive and to achieve operating efficiencies and consistent financial results.

Our Electric Power Operations are performing well. Demand for our Electric Power Infrastructure Solutions is robust driven by broad-based business activity from utility grid modernization, grid security and system hardening initiatives as well as our reputation for consistent and safe execution. This is further evidenced by the meaningful increase in backlog for the segment in the third quarter. Accordingly, we continue to invest in resources ahead of the anticipated start-up of multiple multiyear utility programs and projects. We believe Quanta Solutions offering and ability to safely and consistently execute as industry-leading, and we are uniquely positioned to collaborate with our clients on their multiyear grid programs. Additionally, our communications operations continue to execute well with double-digit revenue growth and margins.

We believe these results reflect our focus on being selective with the risk and margin profile of the work we pursued as well as solid execution. Renewable Infrastructure Solutions segment revenues increased significantly in the third quarter as construction of renewable generation projects ramped up, including solar, wind and battery storage. High voltage electric transmission and substation work also remained active. Segment total backlog reached a record $7.9 billion at quarter end, driven by the addition of a portion of the SunZia Wind contract and various renewable generation, transmission and substation projects. We have mobilized resources for the SunZia project and are performing early stages – stage construction activities. Though the vast majority of the work is expected to be performed in 2024 and 2025.

We believe the infrastructure solutions we provide to the renewable industry are gaining momentum as the energy transition gains pace. We are continuing to make the necessary investments to scale our resources and capacity to handle large-scale multiyear renewable programs that we expect will yield record levels of renewable generation over the coming decade, driven by the IRA and the acceleration of North America’s energy transition. Additionally, we are pursuing billions of dollars of high-voltage transmission projects that are designed to support connectivity of current and future renewable generation capacity growth and overall system reliability. In this morning’s earnings release, we also announced a strategic acquisition of Pennsylvania Transformer Technology or PTT, led by an experienced management team with dedicated employees.

PTT is an established and reliable domestic manufacturer of power transformers and components for the investor-owned utility – electric utility, renewable energy, municipal power and industrial markets. Transformers are a critical path of power grid – of the power grid that facilitate the safe and efficient transmission of electricity from generators to end users. North America’s energy transition and other megatrends that are driving current and anticipated future demand for our electric power and renewable energy solutions are also driving significant demand and growth for the transformer market. As a result, lead times are extended and demand and supply imbalances are only expected to intensify as energy-intensive sectors such as electric vehicles, renewable energy, data centers and manufacturing challenge power infrastructure capacity.

As we have discussed previously, several years ago, Quanta began developing its strategy to create supply chain solutions that are designed to help our clients navigate equipment shortages and delays, reduce cost, improve availability and enhanced capital deployment efficiency, all of which can ultimately benefit the consumer. For Quanta, the addition of PTT should allow us to better manage the availability of certain critical grid components, which in turn should help us better manage our work schedules and productivity. We believe PTT provides Quanta and our clients an important, secure and domestic supply chain solution that is consistent with our strategy. The strong and visible demand dynamics for transformer market provide a favorable long-term profitable growth opportunity for PTT.

The company also possesses intellectual property for certain grid [ph] components, not currently in its production, but that are also in high demand by the utility industry. As a part of Quanta, we believe there are opportunities to enhance and expand PTT’s capacity and product offering, which could accelerate PTT’s growth and provide incremental growth synergies for Quanta’s Electric Power and Renewable Energy Infrastructure Solutions. The Underground Utility and Infrastructure Solutions segment continues to deliver with double-digit revenue growth and solid profitability. Our industrial services operation executed well and we had strong demand for our gas utility and pipeline integrity operations, driven by regulated spend to modernize systems, reduce methane emissions, ensure environmental compliance, and improve safety and reliability.

Additionally, we are increasingly leveraging our underground resources and capabilities to perform underground electric work. While that work is recognized in our electric power segment, it evidences the value and flexibility of our solutions portfolio. The transition towards a reduced carbon economy continues to progress, and we believe is gaining momentum. We believe we are in the early stages of capitalizing on significant opportunities across our service lines and geographies, driven by our collaborative solution-based approach designed to ultimately benefit consumers. Additionally, the growth of programmatic spending with existing and new customers as well as increased renewable generation activity and favorable megatrends provide greater visibility into our near- and long-term growth outlook.

We are currently pacing ahead of long-term financial targets articulated at our Investor Day last year and are increasingly comfortable with our ability to achieve them. This belief is driven by the long-term programmatic spend customers and favorable long-term megatrend opportunities across our portfolio of services, which we believe are in the beginning stages of a multi-decade process. Quanta is investing in the future to meet the needs of our customers and take advantage of the visible opportunities ahead of us, which we believe positions us well for double-digit EPS growth in 2024 and beyond. 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 all our stakeholders. I will now turn the call over to Jayshree Desai, our CFO, for her review of our third quarter results and 2023 expectations. Jayshree?

Jayshree Desai: Thanks, Duke, and good morning, everyone. Today, we announced record third quarter revenues of $5.6 billion. Net income attributable to common stock was $273 million or $1.83 per diluted share and adjusted diluted earnings per share was a record $2.24. Our third quarter electric power revenues were $2.5 billion, and operating income margins were 11.9% as a result of the exceptional performance by our base business activities and telecom operations. Renewable Energy Infrastructure segment revenues for third quarter 2023 was $1.7 billion with operating income margins of 8.7%. The revenue strength in the quarter reflects continued momentum behind renewable energy infrastructure, the quality of our customers and our comprehensive solutions-based approach to the energy transition.

Segment margins improved sequentially as construction activities accelerated across our portfolio of projects. However, they were pressured somewhat by lower-than-expected contingency releases on more mature projects that progressed during the quarter. It’s also worth noting that profit associated with revenues from early-stage work is generally recognized at a lower margin as risk contingencies are included in the cost to complete. During periods of high growth and new project starts, this margin dynamic can be exacerbated, which is influencing 2023 segment margins as year-to-date renewable revenues have grown roughly 50% from 2022. Underground Utility and Infrastructure segment revenues were $1.4 billion for the quarter, and operating income margins were 8.9%, driven by high volumes, solid execution and better fixed cost absorption on increased revenues.

For additional commentary comparing third quarter 2023 to third quarter 2022, please refer to the slides accompanying this call, At September 30, 2023, total backlog was a record $30.1 billion, an increase of $2.9 billion compared to June 30, with growth coming from both large project awards and our base business activities. Our 12-month backlog is also at a record level of $17 billion, approximately $1.4 billion higher than June 30. For the third quarter of 2023, we had free cash flow of $280 million. DSO measured 79 days for the third quarter, aided by favorable billing arrangements associated with certain awards during the quarter. Regarding the Canadian renewable transmission project we’ve discussed in prior calls, the contract asset balance grew during the quarter as we progressed closer to completion.

We continue to have favorable discussions with the customer regarding significant portions of the balance representing approximately seven days of DSO as of September 30, and we remain confident in our position. As of September 30, 2023, we had total liquidity of approximately $2 billion and a debt-to-EBITDA ratio of 2.2 times as calculated under our credit agreement. During the quarter, we made a small acquisition that will primarily report through our Electric segment and as we announced in today’s release, earlier this week, we closed on the strategic acquisition of Pennsylvania Transformer to help address a critical supply chain constraint for our utility, renewable and industrial customers. While we always measure capital deployment against the return opportunities presented by stock repurchases, we continue to see an active pipeline of strategic opportunities that we believe can be executed at accretive valuation and have the ability to drive significant stockholder value.

Turning to our guidance. We performed well through the first nine months of the year, and demand for our portfolio of solutions remains robust. As a result, we are raising our consolidated revenue expectations for the year to range between $20.1 billion and $20.4 billion. From a segment perspective, last quarter, we expected electric volumes to ramp in the fourth quarter. However, as it stands today, we now see revenues in the fourth quarter comparable to the third quarter. Part of the fourth quarter reduction reflects the transferability of resources between the Electric and Renewable segments as renewable revenues continue to expand and encompass both interconnection and generation projects, with interconnection work being performed by crews that would otherwise be captured in the Electric segment.

Additionally, we are seeing pockets of inefficiencies due to supply chain dynamics as well as timing of capital deployment in certain regions shifting into 2024. This variability is a periodic disruption to an otherwise growing demand for our electric solutions, as evidenced by our backlog growth from June 30 levels. Accordingly, we now see Electric segment revenues for the year between $9.6 billion and $9.7 billion, and full year margins for the segment ranging between 10.4% and 10.6% as we continue to build crews and carry costs necessary to execute on the anticipated growth in multiyear utility programs. Of note, we are forecasting storm revenues for the year of around $300 million, roughly 3% of segment revenues for the year, the lowest level of 2019.

Regarding our Renewable segment, given the performance of the third quarter and continued backlog growth, we are raising our full year revenue expectations to range between $5.8 billion and $5.9 billion. Because of the previously described margin dynamics as well as continued investments in labor, training and equipment required to address the segment’s building backlog, we now expect margins for the segment to be around 8% for the year. After another strong quarter, we now expect revenue from our Underground segment to range between $4.7 billion and $4.8 billion, a $300 million increase at the midpoint. From a margin perspective, we expect full year margins for the segment to range between 7.6% and 7.8%, an improved outlook and above the previous high end of our range.

Not included in our expectations are contributions from Pennsylvania Transformer, which will be captured in both our Electric and Renewable segments. We are working through purchase price allocation and accounting considerations and aren’t prepared to give any definitive guidance, but given the size of the business today, we don’t expect the contribution to be material to our quarterly results. In the aggregate, we expect revenues for the year to be almost 20% higher than 2022, and we’ve increased our expectations for full year adjusted EBITDA to range between $1.91 billion and $1.95 billion. For full year adjusted diluted earnings per share attributable to common stock, we’ve now narrowed our prior range, maintained our previous midpoint and now expect between $7 and $7.20.

With regard to free cash flow, we continue to expect between $800 million and $1 billion. We slightly modified other aspects of our guidance, the details of which are included in our outlook summary, which can be found in the Financial Information section of our IR website at quantaservices.com. Our growing backlog and favorable multiyear outlook continues to give us confidence in our ability to achieve the multiyear targets we laid out in our April 2022 Investor Day. Additionally, we believe the acquisition of Pennsylvania Transformer further cements our ability to provide differentiating solutions to our core customers and elevates the critical role we play in the North American energy transition. We are uniquely positioned in the markets we serve and believe we have the opportunity to continue improving our return on invested capital and generating significant stockholder value through organic growth and strategic capital deployment.

I’ll now turn it back to the operator for Q&A. Operator?

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