Quanta Services, Inc.

Greetings. Welcome to Qantas Service's second quarter 2020 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. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. Please note, this conference is being recorded. At this time, I'll turn the conference over to Kip Rupp, Vice President of Investor Relations.

Mr. Rupp, you may now begin. Thank you and welcome everyone to the Qantas Services second quarter 2020 earnings conference call. This morning we issued a press release announcing our second quarter results, which can be found in the investor relations section of our website at QantasServices.com, along with a summary of our 2020 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 Quantum Services website. Please remember that information reported on this call speaks only as of today, August 6, 2020, and therefore you advise 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. These include all statements reflecting QANAs expectations, intentions, assumptions, or beliefs about future events or performance that do not solely relate to historical or current facts. Forward-looking statements involve certain risks, uncertainties, and assumptions that are difficult to predict or beyond QANAs control, and actual results may differ materially from those expressed or implied. For additional information concerning some of these risks, uncertainties, and assumptions, please refer to the cautionary language included in today's press release, along with the company's periodic reports and other documents filed with the Securities Exchange Commission, which are available on QANTA's or the SEC's website. You should not place undue reliance on forward-looking statements, and QANTA does not undertake any obligation to update such statements and 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 diluted 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. Lastly, if you would like to be notified when Quanta publishes news releases and other information, please sign up for email 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? Thanks, Kip.

Good morning, everyone, and welcome to Quanta Services' second quarter 2020 earnings conference call. On the call today, I will provide operational and strategic commentary, and will then turn it over to Derek Jensen, Quanta's Chief Financial Officer, who will provide a review of our second quarter results and full year 2020 financial expectations. Following Derek's comments, we welcome your questions. This morning, we reported solid second quarter results. Our electric power margins were exceptional due to broad-based execution. Pipeline and industrial segment margins, adjusted EBITDA, and earnings per share were all better than we expected. We continue to see opportunity for record backlog and earnings as evidenced by the signing of LUMA energy contract. Cash flow was robust, and we ended the quarter with a strong balance sheet and ample liquidity, all of which we believe demonstrates the resiliency of our business and the operational excellence of our people during extraordinary economic and operating conditions. We believe our resilient business model and strong financial position provides us the opportunity to not only navigate through tough times of uncertainty, but to emerge better positions. Our pandemic health and safety procedures in the field have matured, and we have reliable access to personal protective equipment for our crews. We continue to actively communicate with our customers and believe we have adapted effectively to the unprecedented health and economic environment caused by COVID-19. We recognize the strain that the pandemic is placing on our country, and I again want to recognize and thank our incredible employees for all their hard work, and let our customers know that we value our collaborative relationships with them. Our electric power operations performed well in the second quarter, with solid profitability driven by our focus on cost management and operational excellence. Demand for our electric power services remains strong, with utilities actively deploying capital into their systems to modernize, harden, expand, and adapt to current and future needs. We are actively performing infrastructure work related to renewables and are seeing incremental opportunity driven by renewable power generation associated with onshore and offshore wind and solar development, including substations, transmission interconnects, and battery projects. These renewable energy developments are enabled by backbone transmission, which are also providing larger transmission project opportunities, which we are well positioned for. In June, we announced that the Illuma Energy, a joint venture between Quanta and Canadian Utilities Limited, an ACCO company, was selected by the Puerto Rico Public-Private Partnership Authority for a 15-year operation and maintenance agreement with the Puerto Rico Electric Power Authority, or PREPA, to operate, maintain, and modernize PREPA's more than 18,000-mile electric transmission and distribution system in Puerto Rico. Illuma's efforts under the agreement are intended to deliver long-term social and economic benefits to the people of Puerto Rico. We believe this opportunity is transformative for QANTA and supports our ongoing strategy of providing sophisticated and valuable solutions to the utility industry that benefit consumers. Following a transition period, which is expected to last approximately one year, this arrangement is anticipated to provide a visible repeatable and sustainable long-term earnings and cash flow stream to Quanta, with upside opportunity while requiring no additional capital investment from Quanta or LUMA. Further, we believe there is opportunity for Quanta to compete for electric power and communications work in Puerto Rico associated with its electric T&D system modernization efforts that are separate from Quanta's ownership interest in LUMA. Puerto Rico electric T&D system is at a critical juncture after the destruction caused by Hurricanes Maria and Irma. As a result, the government of Puerto Rico has embarked on a plan to rebuild, modernize, harden, and enable a green power grid, the majority of which is expected to be funded by U.S. federal disaster relief agencies and managed by LUMA. The P3 Authority in Puerto Rico estimates that more than $18 billion of electric T&D capital investment could be required through 2028 for this initiative. Our communications infrastructure services operation, which are included in our electric power segment, continue to perform well. We see ample opportunities for growth in the near and longer term, driven by strong demand for fiber densification to reach homes and businesses. and the early stages of 5G deployments. In our press release this morning, we highlighted our recent acquisition of a Chicago-based company that is a leader in providing engineering, design, permitting, and utility locating services to electric utilities, gas utilities, and communication services companies across the United States. This acquisition meaningfully enhances Qantas' proven engineering and programmatic delivery capabilities in our core utility markets. Additionally, engineering complexity is greater for 5G deployments as compared to previous wireless technologies, and we believe the increased communications engineering and design capabilities this acquisition brings will allow us to capture and execute on more fiber and 5G deployments. Our Latin American operations, which we are exiting, have been hardest hit by COVID-19. As a result, during the quarter, we accelerated our efforts to exit the Latin American region which included terminating various contracts. These factors resulted in a greater than expected loss in the quarter. While uncertainties and challenges remain, we believe the most significant risk of ceasing our LATAM operations have been addressed by our actions and continue to believe our exit will largely be complete by the year end. Turning to our pipeline and industrial segment. As we anticipated, portions of the segment experienced significant disruptions due to the pandemic in the second quarter. However, segment profitability was better than expected due to our rapid adjustment of resources to changing market conditions, effective cost management, and operational excellence. Early in the quarter, our gas utility operations were shut down in several metro markets as shelter in place orders and work restrictions were implemented. Those restrictions began to lift and our activity and utilization rates recovered better than expected through the balance of the quarter. As a result, our full year profit expectations for our gas utility operation remains largely unchanged despite our expectation that some customers' work is now likely to shift into 2021. Utilities remain in the early stages of multi-decade modernization programs to replace aging gas distribution infrastructure in order to meet regulatory requirements aimed at improving reliability and safety and expect an improved environment next year. Demand for our pipeline integrity services remained solid during the quarter and did not experience meaningful impacts from COVID-19. Regulatory requirements continue to encourage our customers to test, inspect, repair, perform maintenance, and replace pipeline infrastructure to ensure the safe, reliable, and environmentally friendly delivery of energy. Further, permitting challenges for building new pipelines make existing pipeline infrastructure more valuable, increasing pipeline owners' desire to extend the useful life of existing pipeline assets through integrity initiatives. Due to these dynamics, we expect demand for our pipeline integrity services will continue to grow. Our industrial services offering is diverse, which benefited us during a challenging quarter. Demand for our catalyst services and tank maintenance remains solid in the quarter. However, due to the negative influence of COVID-19 on the demand for refined products, customers restricted on-site activity for our other services and deferred maintenance in certain turnaround and capital projects to later this year or 2021. Because this work is necessary for the operation of these facilities, we are confident the delayed work will return in the future as economic and market conditions improve. Thus far, our industrial operations are performing consistent with our expectations, and we continue to believe there is opportunity for stability during the balance of the year and improvement in 2021. For the remainder of the segment, portions of our midstream and ancillary services operations experience softness in the quarter as expected. However, these operations did a good job managing costs to the market environment. And finally, larger pipeline projects continue to face permitting challenges. The Atlantic Coast Pipeline, for example. Our larger pipeline project activity this year is not significant. However, we continue to pursue opportunities for 2020 and beyond that would be additive to the segment and our outlook. For the last several years, we have been focused on increasing and gaining scale in the base business of the segment and diversifying the services and geographies of the segment to create a more sustainable and consistent operation. To that end, the three primary service lines we have been focused on are gas utility services, pipeline integrity services, and industrial services, which account for more than 70% of the segment's estimated 2020 revenues. Base business revenues are estimated to account for nearly 90% of the segment revenues this year. Going forward, we expect to continue our focus on growing the base gas utility, pipeline integrity, and industrial services business, consistent with our strategy over the last five years, and continue to believe a post-COVID operating environment will offer opportunity for increased margins and returns for the overall segment. We have increased our financial expectations for the year and taken a prudent approach to our outlook. Additionally, we continue to pursue opportunities in the marketplace that are not incorporated into our expectations and remain positive and confident about QANU's multi-year growth opportunities. Over the past five years, we have executed on our strategy and remain dedicated to growing and enhancing our portfolio of services. which strengthens our ability to capture more of our customers' large programmatic spending programs. These efforts are designed to mitigate risk inherent in our business and prepare for unexpected events through diversification and by maintaining a strong financial profile. We believe Quanta has a long runway ahead of us for generating repeatable and sustainable earnings as we execute on our strategic initiatives. Considering our organic growth opportunities, and the levers available to us to allocate future cash flow generation into value-creating opportunities such as stock repurchases, acquisitions, and strategic investments and dividends, we believe Kiwana has the opportunity to generate meaningful stockholder value over time. To that end, this year we have repurchased $200 million of our common stock, and this morning we announced that Kiwana's board of directors has authorized the company to repurchase up to $500 million in shares of its outstanding common stock through June 30, 2023, under a new stock repurchase program. I would also note that over the past six years, we have repurchased approximately $2.4 billion of common stock, which equates to the retirement of more than 40% of the shares outstanding at the start of those repurchases. We believe these actions demonstrate our confidence in Kiwana and our commitment to generating value for our stockholders. 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 field leadership. We will pursue opportunities to enhance Qantas' base business and leadership position in the industry and provide innovative solutions to our customers. We believe Qantas' 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 Derek Jensen, our CFO, for his review of our second quarter results in 2020 expectations.